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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 Might Dip Over This Bearish News

Once again, the API has put the cat among the pigeons ahead of the weekly EIA inventory report. Prices had already spent yesterday getting stomped on all day, before the API released its report, revealing a surprise 7.6 million barrel build versus the expectation for a minor 0.8 mb draw. This was the largest build since April (think: refinery maintenance), and was a mirror image of last week’s whopping 7.3 mb draw. With last week’s EIA report yielding a significant draw of 5.5 mb, it appears we may see a correspondingly significant build this morning.

API Weekly Crude Inventories (source: investing.com)

Overnight we had further evidence of the ripple effect of a weakening Chinese economy, as Australia’s economy only expanded by 0.2% in Q2, below consensus of 0.4%; China is Australia’s biggest trade partner. Australia joins Canada in showing the pain experienced by commodity-rich countries; GDP data out of Canada yesterday showed that the world’s fifth-largest oil producer had entered recessionary conditions, having seen its economy contract for two successive quarters (albeit by only -0.1% in Q2, -0.2% in Q1). Related: Are “Palm Trees” The Next Step In Solar Energy’s Evolution?

But hold up! I managed to find some good news among the rubble! Yesterday afternoon’s release of light vehicle sales showed an annualized 17.8 million cars and trucks were sold in the US last month, the highest level since 2005. Financing incentives and lower fuel costs are attributed as the main reasons for this latest rise.

This is key ahead of Nonfarm Friday because there is a strong historical relationship betwixt the unemployment rate and vehicle sales (talked about here); rising vehicle sales point to falling unemployment. The ADP report, which tries to steal the thunder from Nonfarm Friday, was just released and has indicated that 191k jobs were created in August, shy of consensus of 201k, with a downward revision to last month’s number to boot.

(Click to enlarge) Related: Midweek Sector Update: The Largest Three-Day Rally In Twenty Years, Can It Last?

Further good news comes from China: its markets will be closed tomorrow and Friday. And relax.

Related: Productivity Gains Prevent Collapse Of U.S Light Tight Oil Production

Today’s two unsurprising pieces of news come in the form of quashing recent rumors. First up, Russian news agencies have quoted Deputy Prime Minister Arkady Dvorkovich as saying Russia won’t cut oil production in order to support prices. Secondly, a Gulf delegate has said that the OPEC bulletin released on Monday has been misread, and does not signal a policy shift or pending production cut.

With this week’s US oil production revisions from the EIA in mind – with June’s estimate dropping to 9.3 million barrels per day from a peak of around 9.6 mn bpd in April – it is encouraging to see signs of progress and resilience from the natural gas market, which has adjusted to a lower price environment for the last half a decade or so due to the shale revolution.

While the Haynesville shale, which produces ~8% of US supplies, has seen gas production remain relatively flat for the last few years, companies are reporting that they can get a 30% return on new wells, even with gas at $2.50/MMBtu, due to technological advancement and innovation. Just as we are seeing improving efficiencies at key shale oil plays such as Permian and Eagle Ford, Haynesville reflects a similar story, with natural gas production per rig continuing to rise.

By Matt Smith

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