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Oil Prices Edge Lower On Firm Dollar

Digits

Oil prices are retracing to start the week, as producer rhetoric rumbles on, and the U.S. dollar strengthens. Hark, here are five things to consider in oil markets today.

1) I was out on CNBC's Squawk Box this morning, talking about a whole host of things, including OPEC exports from Saudi Arabia, Iraq, and Iran. Somewhat at odds with their rhetoric about entertaining a production freeze, their efforts are focused on ramping up exports (although Iranian production, ergo exports, appear to be stalling).

The below chart is an oldie but a goodie; benchmarked at December 2014's export loading volumes, it shows how the three have ramped up exports by 3 million barrels per day:

(Click to enlarge)

2) Prices have rallied over 20 percent this month, driven by the trifecta of short-covering, a softer U.S. dollar, and OPEC jawboning. While we don't see any respite on the jawboning front in the next four (long, long) weeks ahead of the producer 'chat' in Algeria, we are seeing movements on the two other fronts.

Not only has Janet Yellen's speech from Jackson Hole reignited interest rate hike hopes, rallying the dollar, but there has been a second consecutive week of record short-covering. Not only did short positions get slashed to their lowest level in two months, but long positions have increased to the highest level in a year.

(Click to enlarge)

3) Last week we discussed a good few dollops of positive news out about the Permian Basin, the most prolific U.S. shale play. While the total rig count was unchanged last week, pausing after eight consecutive increases, Permian still added three rigs. The Permian rig count is now up 50 percent from its lows in late April.

We have also seen a strong influx of investment into the Permian of late, as productivity gains keep supply levels resilient. The chart below (via Bloomberg / Rystad Energy) illustrates this point, highlighting that the implied number of wells needed to stop Permian production from falling has dropped to 150 a month, from more than 200 for much of last year. As drilling costs drop by as much as half, and as horizontal wells can be drilled for nearly two miles, Permian is continuing to see productivity boosted:

(Click to enlarge)

4) California is leading the charge in terms of renewables in the U.S., targeting 50 percent of its power from renewables by 2030, upping the bar after its target of 33 percent by 2020 is set to easily be achieved. But while California is leading the charge with solar, Texas is ranked number one in terms of wind power.

Wind accounts for some 16 percent of power generation capacity in Texas - while a shift is underway to solar too. Other states should be recognized; Iowa gets nearly a third of its electricity from wind farms - the largest percentage of any state - while New York has just finalized a plan to source half of its power from zero-emission sources by 2030.

While a key kickstarter in the adoption of renewables has been Federal subsidies, wind and solar are continuing to see lower costs (solar is down 48 percent since 2010). Nonetheless, with the extension of the federal solar tax credit, solar in Texas could grow to 19,000 megawatts of capacity, up from 500 today, propelling it in to second place in the U.S. in the next five years - just behind California.

5) It is not just Chinese imports of crude that are faltering (hark, July's crude imports dropped to a six-month low); Chinese copper imports are down to a seventeen-month low. China is the world's largest consumer of copper, hence as its demand slows, the London Metal Exchange sees global inventories reaching a 10-month high.

To exacerbate the weak fundamentals for copper, output could rise in the coming quarters; it has already increased by 5 percent in the first half of the year. As the impact of Chinese economic stimulus measures fade, demand should soften further, while seasonality should play its part, easing further in the second half of the year.

(Click to enlarge)

By Matt Smith

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