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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 In Freefall As Fundamentals Worsen

Crude prices are softening for a third consecutive day thus far, as a decent ADP employment report out in the U.S. has boosted expectations from Friday's official employment report, as well as for an interest rate hike. The dollar is looking higher again, while oil market digest the build to crude stocks from the weekly EIA report. Hark, here are five things to consider in oil markets today:

1) Surging product exports from China are pressuring refining margins lower across Asia, as refiners from India to South Korea and Singapore roll up their sleeves to do battle. Even though Chinese product exports continue to rise as they make inroads into countries such as the Philippines and Australia, impending maintenance and increased regulation / scrutinization of independent teapot refiners in the north of the country is set to stymie their refining activity. This is already being reflected in their import data; with August data nearly complete, imports are down over 20 percent from their peak in March:

(Click to enlarge)

2) Conjecture continues to swirl relating to China's strategic stockpiling. The latest statement from the National Bureau of Statistics was in December, which stated that its SPR was up to 191 million barrels by mid-last year.

According to the chart below, there appears to have been another 250 million barrels accrued since; all the while, the Chinese government say it has pushed back its completion deadline to beyond the current 2020 deadline.

(Click to enlarge)

3) Not only has Nigeria now entered into a recession, but its inflation is up for a ninth consective month to 17.1 percent year-on-year - the highest since October 2005. Its economy contracted for a second consecutive quarter, down by 2.06 percent in Q2.

As we know all too well, all paths lead back to energy, hence the drop in oil prices has clobbered its economy - it relies on oil revenues for ~70 percent of its government income. Not only are lower oil prices taking their toll, but so is sabotage on the country's infrastructure. Exports of Qua Iboe, the country's leading crude stream, have dried up this year amid militant attacks:

(Click to enlarge)

4) Rystad Energy has affirmed what we see in our own production model - that EIA is underestimating domestic U.S. oil production, and that production has stopped declining. Rystad sees output some 120 kbd higher than EIA's August short term energy outlook, and looks ahead to rising Permian Basin production, driven by a rising rig count, and the tapping of DUCs.

It expects to see Permian production rising in the coming months to offset ongoing losses from Bakken and Eagle Ford - boosting outright onshore production. Add in production growth from Alaska and the Gulf of Mexico, and the low for U.S. production this year has likely been seen.

(Click to enlarge)

5) As we edge towards the OPEC / key producer meeting late next month, we are getting the usual run-of-the-mill contradictory comments from key producers. Saudi says it won't boost output to flood the market ahead of talks, even though July's production was at a record, and is expected to rise again this month.

Meanwhile, Iraq's Prime Minister has indicated it will support a production freeze, despite the new Iraqi Oil Minister's first action last week being to request foreign companies to boost production and exports in Iraq. And finally, Iran appears to be willing to be part of a production freeze - as long as it is able to increase production from 3.6 million bpd to 4 million bpd. Hum dee dum.

By Matt Smith

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