Oil ETFs See Long Bets Return

Friday, July 8, 2016

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. Speculators raise bets on oil ETFs

- The United States Oil Fund, an ETF that tracts WTI prices, saw $59.9 million of capital flow into the fund in June. That is the first positive inflow since February.
- In the previous three months, Bloomberg reports, the ETF saw outflows of $1.46 billion as investors ran away from long bets on crude oil.
- But it is not all up from here. On the NYMEX+ICE, hedge funds cut their net long positions by 37 million barrels to 179 million barrels in the last week of June. Short bets also rose by 24 million barrels.
- The recent sell off came after the Brexit vote, as concerns about global financial markets spread. However, fears over the potential for the Brexit to infect wider financial stability appear to be abating.

2. U.S. has largest oil reserves in the world

- A new analysis from Oslo-based Rystad Energy finds that the U.S. holds the world’s largest oil reserves, more than Russia, Saudi Arabia, or Venezuela.
- Venezuela is typically thought of as having the world’s largest oil reserves at 298 billion barrels, but Rystad believes that much of that is undiscovered oil.
- 50 percent of the U.S.’ 264 billion barrels is found in shale, and Texas has at least 60 billion barrels alone.
- Rystad says that there are 2,092 billion barrels of oil reserves in the world, or about 70 years’ worth at today’s production levels. That may seem like a lot, but it is not as if every last possible barrel will be produced. “This data confirms that there is a relatively limited amount of recoverable oil left on the planet,” Rystad warns.

3. Gasoline margins down

(Click to enlarge)

- NYMEX gasoline prices are down 8 percent this week through Wednesday, while crude was down 5.8 percent.
- The Bloomberg chart above shows generic gasoline cracks spreads over WTI, minus generic heating oil crack spread. It depicts a premium for gasoline over heating oil (i.e. higher gasoline margins) in the spring and summer as driving picks up. Gasoline margins typically fall back at the end of summer.
- But as Bloomberg notes, the margin for gasoline has already narrowed sharply this year, at the beginning of summer.
- Much of that is because of the glut of gasoline sitting in storage. Gasoline stocks remain elevated at just under 238.9 million barrels, much higher than the five-year average.
- Also, the EIA recently revised down its gasoline demand for April by 260,000 barrels per day, revealing much weaker demand than the markets previously thought.
- In short, weak gasoline demand and high levels of supply are weighing on prices, which is bad news for crude oil as well.

4. Different companies need different prices for new drilling

- Wood Mackenzie charted the prices that companies need in order to send rigs back into the field.
- Most U.S. shale drillers need prices between $40 and $60.
- Pioneer Natural Resources (NYSE: PXD) has already told shareholders that it will deploy a handful of additional rigs to drill in the second half of this year. EOG Resources (NYSE: EOG) is another driller with prime acreage in Texas, and can return to drilling sooner than others.
- The rig count has climbed by 25 since the end of May, with 11 rigs added by the end of June.
- The fallback in prices as of late will likely stall the gains to the rig count, but if prices can return to $50 per barrel, it should resume its rise.

5. Idled equipment will slow return to drilling

- The sidelining of equipment, rigs, and personnel in the oil industry has been extraordinary in the past two years.
- IHS estimates that 70 percent of the fracking equipment in the U.S. has been idled. Also, 60 percent of the field workers have lost their jobs.
- The shortage of experience workers will slow a return to drilling. As workers migrate to other industries, E&Ps could have trouble finding enough labor. If those workers are to be brought back, the industry may have to offer higher wages. Higher labor costs will erase the “efficiency gains” that so many companies have achieved in recent years.
- More than 70 oilfield service companies have gone bankrupt since the beginning of 2015. With fewer suppliers around, upstream companies will face some bottlenecks when they move to restart drilling.

6. OPEC market share at highest level since 1970s

- OPEC may have shot itself in the foot when it decided to abandon production limits two years ago, but it achieved one of its goals: it has regained market share.
- In fact, OPEC’s market share is now at the highest level since the mid-1970s, with member states accounting for 34 percent of global supply.
- But as Liam Denning of Bloomberg Gadfly notes, that figure could be a bit misleading because OPEC is no longer cooperating very well.
- Nevertheless, OPEC states, which do not go out of business even if oil prices are low, have succeeded in forcing out higher-cost production to regain market share. If oil prices go back up, it will be because it was the shale drillers that exited the market, not the state-run companies in the Middle East.

7. Natural gas prices up on slower storage build

- Natural gas prices have surged 40 percent since the end of May, a sharp rally that provided some life to the market. Prices are at their highest level in a year.
- Heat waves are providing stronger-than-expected demand for this time of year.
- At the same time, natural gas production in all major shale basins has been in decline for most of this year.
- Although storage is at record levels, inventories are building slower than expected as a result of shrinking supply and rising demand.
- Inventories are still above the five-year average, but the “injection season” has started out slowly, suggesting that the market may not be as oversupplied at the end of the year as analysts expected a few weeks ago.

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.