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Global Oil Market Surprisingly Oversupplied

Despite OPEC oil production cuts…

Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Oil Erases Overnight Gains On Bearish Data

It is one hundred and twelve years after the birth of Glenn Miller, and while the oil market was in the mood for an overnight rally, it is now swinging lower. Here are ten energy-related points to consider on this (pinch! punch!) first day of the month:

1) A new month means a new onslaught of economic data releases, and specifically, manufacturing data. China has opened the floodgates overnight, and a bearish wave of numbers has flooded in. Both the official Chinese manufacturing number and the Caixin print were unanimous in being both below-consensus and showing a quickening pace of contraction to boot; the official PMI reached its lowest level since December 2011.

2) We’ve also had a bucketload of European economic data to consider today. The Eurozone manufacturing PMI index was a wee bit above consensus, showing expansion led by Germany, but kept in check by Spain, Italy and France. Eurozone unemployment was also positive, reaching a four-year low at 10.3 percent, while German unemployment remained at a record low of 6.2 percent. Related: Electric Vehicles Could Soon Reduce Oil Demand By 13 Million Barrels Per Day

3) Onto the Americas, and Brazil saw manufacturing come in well below expectations at 44.5 (versus 46.5 expected). Canadian economic growth for Q4 was much better than expected, up +0.8 percent annualized, while official U.S. manufacturing index was also decent, coming in better than expected at 51.3 (versus 51 expected).

4) The chart below from the EIA highlights how Iraq showed the second-largest increase in oil production last year, behind the U.S. Production averaged 4.0 million bpd last year, almost 700,000 bpd higher than the volume seen in 2014. This increase meant it accounted for ~75 percent of total OPEC output growth in 2015. In third place, Saudi was no slouch last year, adding over 300,000 bpd:

5) Pemex is making some serious spending cuts this year, according to Pemex director Jose Antonio Gonzalez. The Mexican state-run oil company is halting a number of exploration and production projects, including deep-water exploration, in an effort to cut its budget by ~$5.5 billion. Pemex says production is set to be dented by 100,000 bpd, finishing the year at 2.13 mn bpd. Related: Oil Giant Cuts Budget By 80 Percent And Suspends Fracking

6) Driven by the threat of losing exploration rights on 142 offshore blocks, companies such as Total and BP are said to be in the market for drilling rigs, helicopters and support vessels to start projects at deepwater Brazilian fields, as permits which were bought up in 2013 (think: $100 oil) are about to expire.

The companies have the option to either drill or abandon permits, which would mean they would face fines and the loss of exploration rights. Hence, despite the unfavorable price environment, the lesser evil for these producers is to be proactive – with production to start as early as next year.

(Click to enlarge)

7) Yesterday we highlighted how Petrobras has signed a deal with the Chinese Development Bank to obtain $10 billion in loans in exchange for supplying crude to Chinese companies. The chart below shows how China’s appetite for crude imports is expected to continue to grow considerably in the coming years; the IEA projects imports to rise by 2.6 mn bpd by 2021.

(Click to enlarge)

8) Nonetheless, Brazil accounts for a minimal share of China’s crude imports. According to our ClipperData, China received an average of 176,000 bpd of crude from Brazil last year (some 3 percent of waterborne volumes, 2 percent of total imports).

While volume may grow in light of this deal, it will be a drop in the bucket compared to the extra 2.6 mn bpd needed by 2021 – the equivalent of Brazil’s current total output. All the while, our February figures show Saudi Arabia accounted for over 20 percent of Chinese waterborne imports last month, the highest share since 2014 (think: Saudi turning the screws on Iran). Related: Oil Price And Its Effect On Production

9) The EIA has released its latest set of monthly oil data, and while U.S. production continues to hold up well, coming in at 9.262 bpd in December, it was the first time that monthly production was lower on a year-on-year basis since September 2011.

10) Not only is it the birthday of the mighty Harry Belafonte, but also Kesha and Justin Bieber. A super Tuesday indeed

By Matt Smith

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  • aaron on March 01 2016 said:
    to clarify: "...such as Total and BP are said to be in the market for drilling rigs, helicopters and support vessels to start projects at deepwater Brazilian fields, as permits which were bought up in 2013 (think: $100 oil) are about to expire."

    The exploratory period for concessions picked up in August 2013 in the 11th licensing round will expire in August 2018. Furthermore, there is strong precedent for extending this period, especially given the huge delays in seismic permitting in the equatorial margin. Exploration wells in the 11th round blocks need to spud before 2018, and later if they are given an extension by the ANP. Maybe a few will go this year or 2017 due to low rig rates. Also remember that these are exploration wells: any production from a discovery would start 5-10 year later.

    "...with production to start as early as next year" is completely inaccurate.
  • kamakiri on March 01 2016 said:
    Got the wrong headline by mid-day again!

    Were the losses lost, or the gains regained?

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