Friday, December 11, 2015
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. OPEC’s Spare Capacity
- OPEC still has room to ramp up production
- Iran is expected to bring 0.5 million barrels per day (mb/d) to 1 mb/d next year.
- Saudi Arabia has 2 mb/d to work with, although it’s highly unlikely it will drawdown a large portion of that.
- In fact Saudi Arabia’s 2 mb/d is historically low. OPEC had more than 6 mb/d in spare capacity in 2002 for example.
- Libya’s figures are not counted in the chart above. Although widespread violence and an ongoing political and security crisis will prevent full restoration of its potential, Libya still has over 1 mb/d in unused oil potential. Some of that could come back if one or both of the rival government factions can manage to open up oil export terminals.
- In the near-term, OPEC could add more crude to the oversupplied market. Iran, Saudi Arabia, Iraq, and Libya all could chip in to raise global supplies.
2. Oil prices track speculative movements
- Oil prices tend to move with the speculative movements of oil traders. When speculators bet oil prices will rise, there is upward pressure on prices, and vice versa.
-…
Friday, December 11, 2015
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. OPEC’s Spare Capacity
- OPEC still has room to ramp up production
- Iran is expected to bring 0.5 million barrels per day (mb/d) to 1 mb/d next year.
- Saudi Arabia has 2 mb/d to work with, although it’s highly unlikely it will drawdown a large portion of that.
- In fact Saudi Arabia’s 2 mb/d is historically low. OPEC had more than 6 mb/d in spare capacity in 2002 for example.
- Libya’s figures are not counted in the chart above. Although widespread violence and an ongoing political and security crisis will prevent full restoration of its potential, Libya still has over 1 mb/d in unused oil potential. Some of that could come back if one or both of the rival government factions can manage to open up oil export terminals.
- In the near-term, OPEC could add more crude to the oversupplied market. Iran, Saudi Arabia, Iraq, and Libya all could chip in to raise global supplies.
2. Oil prices track speculative movements
- Oil prices tend to move with the speculative movements of oil traders. When speculators bet oil prices will rise, there is upward pressure on prices, and vice versa.
- Of course, speculators stake out positions based on a variety of factors, ostensibly due to underlying fundamental data.
- But that isn’t always the case. Fundamentals change slowly, but oil prices are volatile. That is because speculators are fickle, and can move prices quickly when the “herd” feels a change in sentiment.
- Lately, oil traders have staked out some of the most pessimistic (i.e. net-short) positions in several years.
- Around 300 million barrels of net-short positions have been taken, including Brent. That pushes down oil prices. However, as we noted last week, amassing such a position tends to provoke “short-covering,” so prices could snap back once sentiment changes. Sometimes the catalyst can be a small piece of economic data, such as a manufacturing report, or job increases.
3. China is a drag
- The crash in oil prices since 2014 is largely a supply-side phenomenon. U.S. shale flooded the market.
- But China has made things a lot worse. Oil demand in 2014 was below average in recent years. 2015 was broadly similar, except that demand has taken a dive this fall after a summer of economic turmoil.
- Demand was propped up by China filling its strategic petroleum reserve. In the first half of 2015, the extra buying from China added about 0.5 mb/d in global demand.
- But China’s oil demand could slow even further next year, poor timing for a world hoping to see oil markets balance.
- China’s demand growth in 2016 is expected to slow to just 0.3 mb/d.
4. More oil, fewer rigs
- Rig counts have collapsed, but more oil continues to be produced from each rig left standing.
- Productivity has climbed even from January 2015. The EIA expects an average rig to produce 719 barrels per day from the Bakken in January 2016 compared to just 500/day from a year earlier.
- Similar gains are apparent in all major shale areas in the United States.
- Companies have scrapped inefficient rigs, focused on sweet spots, drilled more laterals, used more sand, etc. All of these techniques have made drillers more efficient.
- The efficiency gains have allowed shale production to avoid more severe cutbacks in output.
- Still, overall, the EIA sees overall U.S. shale output dropping by 116,000 barrels per day in January 2016 compared to December 2015.
5. Iran’s new oil and gas projects
- Iran is offering 52 new oil and gas projects and is hoping to attract international investment to help ratchet up its production. The National Iranian Oil Company posted details on its website.
- The fields are spread across 18 exploration blocks.
- Iran hopes to attract $25 billion worth of investment initially, which it hopes will rise to $185 billion by 2020.
- Iran tweaked its contract terms, allowing foreign companies to book reserves or take equity stakes in Iranian companies. Still, Iran’s NIOC would still own the resources.
- Iran held a conference attended by BP (NYSE: BP), Statoil (NYSE: STO), Total (NYSE: TOT), Royal Dutch Shell (NYSE: RDS.A), Repsol (BME: REP), and Sinopec (NYSE:SHI). No American companies attended.
- Expect 0.5 to 1 mb/d in additional production next year coming from Iran.
6. Renewable Energy becoming first choice for new power plants
- The above chart depicts new power plants completed in October 2015 across the United States.
- The 170 megawatts of capacity were added, 126 MW of which was solar (or about 75 percent).
- Interestingly, two battery projects began operations, adding 40 MW of energy storage.
- Also, 447 MW of new projects were announced in October, 400 MW of which will come from wind (or 89 percent). Almost all of the rest will be solar.
- These figures illustrate a growing trend – new generation capacity is coming overwhelmingly from renewable energy these days. Natural gas is also still rising quickly, but don’t expect any new nuclear or coal in the future.
- In other words, a major energy transition is very much underway.
7. High-yield bonds seeing rising defaults
- Junk bonds will post their first annual loss since the financial crisis in 2015.
- The successful years since 2009 come largely on the back of loose money from the Federal Reserve, pushing investors into riskier assets.
- That has help fueled the drilling boom. But the market has soured with the collapse in crude prices.
- High-yield corporate bonds are down by more than 2 percent in 2015. But the energy sector is the driving force – energy junk bonds are down 14 percent.
- The default rate has climbed to 2.6 percent. But that is expected to rise quickly to 4.3 percent in 2016, breaking above the 30-year average of 3.8 percent.
- “In most high-default periods we’ve seen in the past, the rise in default rates precedes a recession,” NYU Professor Edward Altman told the WSJ.
- There are $1.3 trillion in junk bonds outstanding, up from $709 billion in 2007.
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.
