In the latest edition of the Numbers Report, we'll take a look at some of the most interesting figures put out this week in the energy sector. Each week we'll dig into some data and provide a bit of explanation on what drives the numbers.
Let's take a look.
1. Banks trim lending to oil and gas
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- Banks review their credit lines to oil and gas companies twice a year - in the autumn and spring - and make adjustments depending on the oil price and how much oil a company can produce. Lower oil prices, all things equal, lead to a reduction in credit for an oil driller.
- Lenders were more lenient than expected last year, keeping the credit lines open to struggling drillers. Much of that has to do with the fact that lenders still want to be paid back, so shutting off the taps and pushing a company into bankruptcy can be self-defeating.
- Still, Reuters reports that $3.5 billion in credit has been cut from more than a dozen companies so far this spring. Whiting Petroleum (NYSE: WLL) was the recipient of one of the largest reductions, with its credit line cut more than $1 billion.
- There have been 59 bankruptcies in the U.S. oil and gas sector since the beginning of 2015, a figure that will increase as indebted companies are cut off.
- If the current pace of credit redeterminations continues, the industry could lose access to a combined $10 billion by next month.
2. Equity markets have been generous
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In the latest edition of the Numbers Report, we'll take a look at some of the most interesting figures put out this week in the energy sector. Each week we'll dig into some data and provide a bit of explanation on what drives the numbers.
Let's take a look.
1. Banks trim lending to oil and gas
(Click to enlarge)
- Banks review their credit lines to oil and gas companies twice a year - in the autumn and spring - and make adjustments depending on the oil price and how much oil a company can produce. Lower oil prices, all things equal, lead to a reduction in credit for an oil driller.
- Lenders were more lenient than expected last year, keeping the credit lines open to struggling drillers. Much of that has to do with the fact that lenders still want to be paid back, so shutting off the taps and pushing a company into bankruptcy can be self-defeating.
- Still, Reuters reports that $3.5 billion in credit has been cut from more than a dozen companies so far this spring. Whiting Petroleum (NYSE: WLL) was the recipient of one of the largest reductions, with its credit line cut more than $1 billion.
- There have been 59 bankruptcies in the U.S. oil and gas sector since the beginning of 2015, a figure that will increase as indebted companies are cut off.
- If the current pace of credit redeterminations continues, the industry could lose access to a combined $10 billion by next month.
2. Equity markets have been generous
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- U.S. exploration and production companies have $353 billion in outstanding debt, and $128 billion of that, or 36 percent, is in junk territory.
- The market cap of the U.S. E&P sector fell by $340 billion between May 2015 and March 2016.
- Equity issuance plunged in the latter half of 2015 after a massive first quarter, as falling oil prices scared away companies and investors from new offerings.
- However, in the first quarter of 2016, several E&P companies and a lot of their investors tried to bet on the bottom - an estimated $8.9 billion in fresh equity was issued in the sector, or about ten times that of the fourth quarter of 2015.
- On the other hand, debt issuance is at a two-year low as creditors take a more cautious approach (note #1 above).
3. Oil shorts up, down, and up again
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- Short positions on oil increased by 35 percent for the week ending on April 5, according to CFTC data, as speculators thought the rally between February and March had reached its limits.
- The increase of 26,521 short contracts for April 5 was the largest increase since July 2015.
- Then the EIA reported on April 6 that oil storage levels fell by 4.9 million barrels, ending two months of gains. Oil surged back to $40 per barrel on the news, burning more than a few short investors.
- Since then, however, the data has been mixed. U.S. oil production continues to decline - weekly production figures show output fell below 9 million barrels per day last week - but inventories rose again.
- Oil prices are in a bit of a holding pattern at $40 per barrel. The next price movements - and speculative bets - will likely depend on what happens in Doha on Sunday.
4. China has too much LNG contracted
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- LNG prices have crashed because of a surge in liquefaction capacity combined with a collapse in oil prices, to which LNG prices are closely linked. But LNG markets are also oversupplied because demand in Asia is much lower than expected.
- China's LNG demand in 2016, according to the Oxford Institute for Energy Studies, stands at about 26 billion cubic meters on an annual basis, which is largely unchanged from 2015.
- But China has contracted out much more LNG capacity than it can absorb. And it will take until the 2020s before Chinese demand catches up.
- China could resell some of this capacity, flooding the market with LNG supplies.
- Japan and Korea, much more mature LNG markets, could see demand decline in the years ahead.
- LNG exporters have China at the core of their demand scenarios, and China is expected to eventually see strong growth in LNG imports, but for now, demand is not growing much. LNG markets could remain oversupplied for several years.
5. EIA pessimistic about supply/demand imbalance
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- The EIA sees global oil production exceeding demand well into 2017, a rather downbeat assessment for the health of the oil market.
- Inventories increased by an average of 2.1 mb/d in 2015. The EIA expects inventories to increase at a slower pace of about 1.4 mb/d in 2016, but only decline to 0.4 mb/d in 2017.
- In contrast, the Paris-based International Energy Agency (IEA) is more bullish. In its latest monthly Oil Market Report, the IEA expects the inventory surplus to run at about 1.5 mb/d in the first half of 2016 (in line with the EIA's 1.4 mb/d), but then narrow sharply to 0.2 mb/d in the third and fourth quarter of this year.
- Forecasting is inherently difficult, but those two assessments are far part - the difference between the oil market balancing in a few months, and more than a year from now. If the EIA is correct, oil prices will languish at current levels for at least another year, while under the IEA's scenario, oil prices should rebound in the near future.
- Meanwhile, non-OPEC production fell by 180,000 bpd in March, taking it down to about 700,000 bpd below year-ago levels. OPEC production fell by 90,000 bpd in March due to supply outages in Nigeria, Iraq, and the UAE. The trend is clear - supply is falling and demand is rising. The only question is how quickly those trend lines are converging.
6. Contango flips to backwardation
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- The contango for Brent crude has vanished, at least temporarily, with the futures market shifting into backwardation. Contango occurs when front-month oil futures are cheaper than contracts several months away. Backwardation is the reverse - front-month contracts are more expensive than oil deliveries further out.
- The market flipped to backwardation on April 7, for the first time in three months. Brent for June delivery traded at 7 cents per barrel higher than July delivery.
- Reuters reports that the sudden backwardation suggests several things. First, concerns over a near-term glut have eased. In fact, the premium for front-month deliveries has occurred because of concerns about supply outages in Iraq, maintenance in the North Sea, and rising demand from South Korea. Also, airlines have stepped up hedging for 2017 and 2018.
- In short, the backwardation is a sign that the state of oversupply is easing.
- An oil market analyst for Wood Mackenzie told Reuters that "the market is in the process of realizing that there's a change in the fundamentals this year." Also, Mark Routt, Chief Economist in the Americas for KBC Advanced Technologies, told Reuters: "We've got a growing perception that supply and demand is starting to balance in the second half of 2016," and then he added, "this is perhaps a premature response to that."
7. Natural gas storage levels abnormally high
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- Natural gas storage levels are at 2,478 billion cubic feet (Bcf), a record high for the end of March. The winter heating season was mild, leading to lackluster demand.
- Natural gas production is falling, but was still near record highs during the winter. As a result, the U.S. has exited the withdrawal season and is now entering the injection season with near record natural gas storage levels.
- The glut has pushed natural gas prices below $2 per million Btu (MMBtu). However, the EIA sees production staying flat while demand should hit a record this summer as gas consumption in the electric power sector (with more and more shuttered coal plants) rises by nearly 4 percent over last year. Consumption averages 76.2 Bcf/d in 2016.
- The EIA expects natural gas prices to average $2.18/MMBtu in 2016, rising to $3.02/MMBtu in 2017. Those low prices have led to a sharp fill in the natural gas rig count (now below 100), and drilling has slowed significantly. By next year, activity should pick up as prices rise.
That's it for this week's Numbers Report. Thanks for reading, and we'll see you next week.
