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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 Extends Losses As EIA Reports Filling Inventories

As the latest weekly inventory report from the EIA shows builds to both crude and gasoline, prices have reversed course and are charging lower. Hark, here are six things to consider in energy markets today.

1) Brazil is considering scrapping nationalistic oil legislation – which was implemented by President Dilma Rousseff – in favor of a concession model which would attract more international investment. While the legislation was put in place to primarily benefit Petrobras, widespread corruption in the state-run oil company and low oil prices have led to the change of heart. While the changing of legislation may take up to a couple of years, its implementation would remove the obligation for Petrobras to operate all oil fields – encouraging outside investment.

According to our ClipperData, Brazilian crude exports averaged just shy of 600,000 bpd last year, and are currently closer to 560,000 bpd this year. The leading recipient of Brazilian crude is China, accounting for about a third of exports. Brazil currently has a $10 billion credit line with China, which it is repaying in cash or oil, depending upon China’s request.

This is in addition to a deal where Petrobras sends up to 200,000 bpd per month to China, in a long-term deal struck in 2009 (hark, their last financial crisis). Uruguay is a close second in terms of export volumes, while the U.S is a distant third, accounting for ~10 percent. India is fourth.

(Click to enlarge)

2) Oil prices were trying to muster a recovery today before another underwhelming weekly inventory report has extinguished the bullish mood. Prices are charging lower as the report showed a drop in refinery runs and higher imports, paving the way for a bearish build to crude stocks.

Another build to gasoline stocks and a large build at Cushing has only added to the bearish tone. A drop in refinery runs at the peak of summer driving season indicates refiners are dialing back amid faltering profit margins, while a tick higher in domestic production led by an increase in Alaskan output is the cherry on top of a bearish report.

3) We continue to keep an avid eye on China, with our expectation that crude imports will persist in hitting the brakes as storage reaches its brims and the appetite of Chinese teapot refiners is sated. The below chart helps to add further credence on the teapot front, as independent refiners are now operating at less than half their capacity – a six-month low.

As refinery margins drop, costs for teapot refiners remain fairly high, as they need to transport products from their inland locations to export terminals. The combination of these two factors are expected to provide headwinds to rising product exports going forward. Related: Libya’s Oil Deal Turns Sour As Army Chief Threatens To Bomb Tankers

(Click to enlarge)

4) As coal miners across the globe cut output, the coal market appears one step ahead of the oil market in coming into balance. Accordingly, we have seen European coal prices rising above $60/tonne – the highest in a year. Production cuts from China, who rely on coal for 64 percent of its energy needs, is meaning the largest emerging market is importing more instead. Asian prices are also pushing on in sixty dollardom, as coal consumption is expected to increase despite a slowing global economy.

5) Signs of optimism in the U.S. oil patch are not just coming through from the rig count or rhetoric from oil services companies. The share price of four U.S. sand miners are going absolutely nuts, rallying by an average of 320 percent from their 52-week lows. The rise appears to be a bet on increasing activity in hydraulic fracturing; the fracking of an average well requires 3,000 tons of sand. Hence, increased drilling activity will translate into a boom for sand – something investors are trying to get ahead of.

6) As we continue to shuffle through the peak demand period of summer driving season, retail gasoline prices are continuing to trundle lower, encouraged by falling crude prices and a gasoline glut. While the national average sits at $2.11/gal, California prices are well anchored in two dollardom at ~$2.75/gal, while on the other coast, South Carolina pays a mere ~$1.80/gal. Prices should continue to gradually drift lower through the duration of the summer.

(Click to enlarge)

By Matt Smith

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