Friday March 10, 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. Oil prices fall most in a year this week, contango returns
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- Oil prices plunged by more than 8 percent on Wednesday and Thursday after another record setting oil inventory report from the EIA. It was the sharpest decline in more than a year.
- WTI dipped below $50 per barrel for the first time since the OPEC deal was announced.
- The return of bearish sentiment is visible in the reemergence of the market contango – in which front month oil contracts trade at a discount to futures further out, a sign of near-term oversupply concerns.
- This was familiar territory before the OPEC deal – huge inventories, excess supply, and anxiety about when the supply overhang will clear.
- “Everything has been put in doubt,” Olivier Jakob, managing director of consultancy Petromatrix GmbH, told Bloomberg. “It shows that the market is still very fragile.”
2. Oil volatility lowest in more than 1 year
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- Oil prices have been uncharacteristically calm so far in 2017 (until this week), with price volatility falling to its lowest level in a year.
- WTI…
Friday March 10, 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. Oil prices fall most in a year this week, contango returns

(Click to enlarge)
- Oil prices plunged by more than 8 percent on Wednesday and Thursday after another record setting oil inventory report from the EIA. It was the sharpest decline in more than a year.
- WTI dipped below $50 per barrel for the first time since the OPEC deal was announced.
- The return of bearish sentiment is visible in the reemergence of the market contango – in which front month oil contracts trade at a discount to futures further out, a sign of near-term oversupply concerns.
- This was familiar territory before the OPEC deal – huge inventories, excess supply, and anxiety about when the supply overhang will clear.
- “Everything has been put in doubt,” Olivier Jakob, managing director of consultancy Petromatrix GmbH, told Bloomberg. “It shows that the market is still very fragile.”
2. Oil volatility lowest in more than 1 year

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- Oil prices have been uncharacteristically calm so far in 2017 (until this week), with price volatility falling to its lowest level in a year.
- WTI and Brent have been stuck within a narrow range of about $4 per barrel.
- On March 2, Brent implied volatility fell 22.7 percent, a five-percentage point decline since February 1.
- However, that could change. The markets were shaken out of their slumber on March 8, with a more than 5 percent price decline in a single day after the EIA reported a shocking increase in crude inventories. It remains to be seen if the sudden uptick in volatility will stick around.
3. Supply growth to slow

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- The IEA warned in a new report that global oil supplies could fall short of demand at the beginning of the next decade.
- Sharp cuts to upstream investment between 2014-2017 could lead to precious few new sources of oil production a couple years down the line.
- Non-OPEC oil supply fell by 0.8 mb/d in 2016, but will rebound and increase by 3.3 mb/d by 2022.
- But global demand will rise by 7.3 mb/d by 2022, led by Asia.
- That will put a lot of strain on OPEC to meet demand, forcing it to burn through spare capacity.
- The end result, the IEA warns, is a price spike by the early 2020s as supply struggles to keep up with demand.
4. Non-OPEC producers get boost from OPEC

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- Non-OPEC supplies are expected to grow over the next five years, as mentioned above, by about 3.3 million barrels per day.
- That is twice as high as the IEA’s assessment last year. What changed? The OPEC deal.
- OPEC’s cuts are accelerating the adjustment process, taking oil off the market and boosting prices. That is opening up opportunities for non-OPEC producers; mainly U.S. shale.
- Much of the gains in non-OPEC production over the next five years will come from U.S. shale – which will add 1.4 mb/d. Although if prices rise to around $80 per barrel, the IEA says, U.S. shale could increase production by a much larger 3 mb/d.
- The flip side is that OPEC may balk at extending cuts in the near-term if U.S. shale comes back too quickly.
5. Drilling costs decline

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- The IEA’s Upstream Investment Cost Index shows a 30 percent decline in each of the last two years as companies slashed drilling, shed workers, found efficiencies and forced oilfield services companies to cut prices.
- Cost deflation accounted for about two-thirds of the declining costs, with the other third made up from lower activity.
- However, costs are expected to rise again with the pickup in activity. The IEA estimates that 50 to 60 percent of the “savings” over the past two years will be unsustainable. More drilling means more expensive rigs, higher labor costs, etc.
- That means that the breakeven prices trumpeted by the industry won’t be sustained.
6. Exxon’s return on capital not what it used to be

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- It has been a bad few years for the oil majors, with falling revenues leading to rising debt, deferred investments and even stagnant oil production.
- Between 2000 and 2011, ExxonMobil’s (NYSE: XOM) upstream unit returned a whopping 33.4 percent on capital employed, much higher than its chemical (20.5 percent) and downstream (19.7 percent).
- However, since 2008, returns on upstream investment have plunged, now returning almost nothing to investors.
- Exxon is shifting with the market. An era of low oil prices is forcing the oil major to focus on shorter-cycle shale projects and petrochemical complexes, as opposed to the ultra-deepwater projects of the past. Megaprojects offered juicy returns once, but market volatility and cost inflation make them especially risky today.
- The shift in focus towards smaller projects will reduce risk to investors, but it will also ensure relatively low returns on capital employed for the foreseeable future.
7. Renewables dominate the future

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- There is a lot going on in the this graph, but the main point is that the Asia-Pacific (APAC) will invest $2.279 trillion in new electric power generation through 2025, and more than half of that will come from renewable energy, according to Bloomberg New Energy Finance.
- Solar will receive $570 billion in new investment while wind will take in $394 billion.
- BNEF says that China will only invest $403 billion combined in new coal and gas generation, about 23 percent less than last year’s estimate.
- Globally, about $4.4 trillion in new investment will go into power generation over that timeframe. In the Americas, solar and wind also capture the lion’s share of new investment, with natural gas capturing a smaller slice. The same is true for Europe.
- Nuclear power only sees strong growth in Asia – mostly from China.
- The outlook is clear: renewables are growing from a small base today, but they will account for the bulk of new investment going forward.
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.