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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 Prices Approach $26 After Bearish IEA Report

One hundred and thirty-one years after the first rollercoaster was patented by L.A. Thompson, and the crude complex is aboard the big dipper once more. As global equity markets look set to enter bear market territory, and fears persist that the oil market could ‘drown in oversupply’, crude continues to tumble lower and lower. And lower.

In terms of economic data flow, good ole’ Blighty has seen its unemployment rate reach the lowest level since early 2006 at 5.1 percent – but you wouldn’t know it by looking at the Great British Pound, which has been getting walloped down to multi-year lows.

On the topic of currency wallopings, the Russian ruble has descended to a new record low. The ruble has broken above 80 per U.S. dollar for the first time ever, as the drop in oil pricing slashes away at Russia’s largest source of revenues. What makes matters worse is that the ruble has not kept pace with the drop in oil prices, meaning the currency likely has further to fall.

Onto the U.S., and as we know ——-> all paths lead back to energy ——> hence, inflation dropped in December by 0.1 percent, led by a drop in energy prices. Core inflation rose by 0.1 percent, while inflation on a year-over-year basis actually saw its biggest increase in a year, up 0.7 percent YoY: Related: Is This The Bottom? Balance In Oil Markets Closer Than Many Think

US CPI, % YoY (source: investing.com)

Bad news across the board continues to arrive in torrents. We are getting into the midst of earnings season, and starting to get a trickle of quarterly results from the oil and gas sector. Shell is the first up from Big Oil, and has delivered earnings of $1.6 – $1.9 billion dollars for the fourth quarter of last year, down ~50 percent on the year prior. Shell is putting on a brave face, and pinning its hopes on a merger with BG to revive its fortunes; all the while, capex cuts and job losses are the order of the day – 10,000 jobs are expected to be cut from the two companies over the next year. Related: Does Buffett See A Bottom In Oil Prices

Elsewhere in the world, we continue to hear of spending cuts; the Malaysian state-owned oil company Petronas is the latest with such news, with a plan to cut spending by $11.4 billion over the next four years. The recent estimate of $380 billion of postponed or canceled projects looks set to keep swelling the longer we remain in twenty-dollardom….

Chinese President Xi Jinping is currently on a tour of the Middle East this week, visiting both Saudi Arabia and Iran – and being welcomed with open arms as both countries look to further expand their relationships with (aka, increase their oil sales to) the second largest economy in the world. While tensions between Saudi and Iran have been heightened due to the proxy wars they are currently fighting in Yemen and Syria, there is a further increased air of animosity due to the lifting of Iranian sanctions in recent days.

Both countries are already key crude suppliers to China. According to our ClipperData, China was the largest destination for Iranian crude exports, making up for over 40 percent of them in 2015. Nonetheless, as the chart below illustrates, as China’s total crude imports have been dropping over the second half of last year, Iran has seen its imports fall, while Saudi Arabia’s have held up much better.

Saudi Arabia and Iran crude exports to China (source: ClipperData)

Looking ahead, while Iran may attempt to increase its exports to China this year as its production rises, the second largest destination for its exports, India, may be a better target as India’s crude imports (read: demand) appear to be holding up much better. That said, the most logical destination for new Iranian exports would be Europe – a market they have been cut off from in recent years, and one in which they can reacquaint themselves. A cut in their OSP to Northwest Europe for next month indicates this scenario is on the cards. Related: The World Just Lost One Of Its Biggest Oil Plays To Low Prices

As the chart below from the EIA illustrates, Iran’s production is expected to ramp up fairly significantly this year. Iran projects that production will increase by 500,000 bpd in the coming weeks, along with a further 500,000 bpd in the next few months. The IEA in their monthly oil market report yesterday projected it will rise by 0.3 million bpd by the end of the current quarter, and by 0.6 million bpd by mid-year. The EIA expects it to average 3.1 bpd in 2016, an average increase of 300,000 bpd across the entire year. In summary: material increases of varying proportions.

(Click to enlarge) 

By Matt Smith

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  • The Shadow Broker on January 20 2016 said:
    Biggest financial collapse in history incoming this year! Gonna be a wild ride.

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