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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 Charging Lower As Oversupply Concerns Plague Traders

One hundred and three years after the first street cars were employed in San Francisco, California, and the crude complex is once again on a bumpy ride downhill.

After last week’s Santa rally, prices are charging lower today in a post-Christmas slump kind-of-way, as thin trading volumes mean price swings are magnified. The Brent-WTI spread is now back to parity after the lifting of the U.S. oil export ban, and both benchmarks today are selling off on oversupply concerns and renewed worries about the Chinese economy.

Over the last few days we have had a dusting of economic data out of Japan, and very little else. Preliminary Japanese industrial production for November came in at -1.0 percent, below expectations of -0.6 percent. Retail sales were spookily the same, matching both consensus and the actual print. Monthly Russian GDP data today illustrated its ongoing struggles, with its economy contracting by 4.0 percent YoY for November, worse than expected.

We see a return to form in economic data in the coming days from both Europe and the U.S., with an end-of-month rush of releases. We also get the weekly EIA inventory report at its usual time on Wednesday – the biggest market-moving event for the crude complex this week. Last week’s report yielded a hefty 5.9 million barrel draw to total crude stocks, led by a whopping 7.9 million barrel draw from PADD3 – as ad valorem tax mitigation kicked into full force. Related: Top 10 Oil And Gas Stories Of 2015

As we are set to hop, skip, and jump into 2016, the below graphic starkly illustrates what EIA sees in store for U.S. production. EIA projects that production from U.S. shale plays will drop by 570,000 barrels a day next year – a record. Related: China's $1 Trillion Nuclear Plan

The ongoing low oil-price environment points furiously towards a rough 2016 for U.S. producers. Bloomberg estimates that $99 billion of high-yield energy bonds are trading at distressed prices, while companies such as ConocoPhillips and Marathon slash spending next year (by 55 percent and 60 percent, respectively). 2015 has already seen the value of assets for various U.S. oil and gas producers ratcheted lower, with more of the same in store for 2016: Related: OPEC: $95 Oil, But Not Until 2040

Finally, the Saudi government has announced its budget today for 2016, with a revenue target of 513 billion riyals. It has cut its spending target to 840 billion riyals; its target in 2015 was 860 billion riyals (but it overran this by 13 percent to 975 billion). Actual revenue in 2015 was 608 billion riyals, compared to a forecast of 715 billion at the beginning of the year. All this means that Saudi’s deficit is ~16 percent of its gross domestic product.

By Matt Smith

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