Friday July 7, 2016
In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.
Let’s take a look.
1. Oil stocks down in 2017
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- The MSCI World Energy Sector Index, which tracks 90 oil and gas companies, is set to post a second consecutive quarter of declines, according to Bloomberg.
- The 90 companies have lost a combined $115 billion in market value since April, a shocking deterioration that has corresponded with the new bear market for oil.
- The weak figures also show that the industry is entirely hostage to the price of oil – the severe spending cuts and efficiency gains aren’t enough to offset a 10 to 20 percent drop in oil prices.
- Only 17 of the 90 companies in the index saw their share prices rise this quarter.
2. Short selling likely peaked
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- The bear market for oil over the past month came as traders and speculators staked out an incredibly pessimistic position in oil futures.
- Short bets rose to the highest level in a nearly a year according to data for the week ending on June 27.
- But those bets likely ran their course as the increase came close to leveling off. Data is reported on a lag so it is still unclear what is currently unfolding, but the nearly two-week rally in oil prices likely corresponded with a liquidation of some of those short bets.
- With oil prices once again leveling off in the mid- to high-$40s, the speculative positioning is a bit more balanced.
3. China staking future on natural gas
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- China, the world’s largest coal consumer is trying to pivot to natural gas in order to clean up the horrific smog in many of its cities.
- The major obstacle to switching to natural gas is price. Regulated prices in China make natural gas some of the most expensive in the world.
- But lowering prices would hurt domestic producers, and China is trying to incentivize home-grown gas production.
- China hopes to get 10 percent of its energy from natural gas by 2020, up from 6 percent today. By 2030, it hopes gas will account for 15 percent.
- The end result would be a steep reduction in coal consumption.
4. Heavy trucks to add 5 mb/d of oil demand
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- The IEA warned this week that heavy trucks and freight road transit will see strong oil demand growth in the decades to come without adequate regulation and emissions standards.
- The rise of electric vehicles, and what that means for potential peak oil demand, has garnered a lot of attention. But passenger vehicles only account for a quarter of oil demand, while road freight accounts for nearly as much at 18 percent.
- An estimated 40 countries have efficiency standards for passenger vehicles, but only 4 have them for heavy trucks.
- Without limits, road freight will see an increase in oil demand by 5 mb/d by 2050.
5. Energy stocks no longer correlated with value stocks
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- According to Bloomberg, the S&P 500 Value Index used to track energy companies very closely. As recently as 2012, the correlation was close to 1, meaning they tracked each other almost entirely.
- But the correlation has recently been cut in half. Bloomberg says that the slimming down of the energy sector as a whole because of the meltdown in oil prices leaves them with less influence over the S&P index.
- But low and volatile oil prices also mean that energy stocks can sink sharply even though the broader market is doing quite well.
- The significance is that investors will no longer seek out energy companies for value. “Energy is likely not considered ‘value’ at this point due to the vulnerability of the sector to large swings in oil prices, driven not by the usual cyclical factors but rather by secular issues tied to supply and demand,” John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, told Bloomberg.
6. EV sales to accelerate faster than expected
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- The rapid and ongoing decline in the cost of lithium-ion batteries will mean that electric vehicles could take more market share, faster than previously expected.
- By 2025-2029, EVs could drop below gasoline-powered vehicles on price. Once crossing that threshold, EV sales will take off.
- A new report from Bloomberg New Energy Finance (BNEF) finds that EV sales could capture 54 percent of the light-duty market by 2040, up from the 35 percent BNEF predicted in its previous forecast.
- That will translate to the displacement of 8 million barrels of daily crude oil demand, a substantial volume that could keep a permanent lid on prices. At the same time, the roll out of EVs will add 5 percent to global electricity consumption.
7. Sharper drawdown in U.S. oil inventories
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- The EIA reported a sharp drawdown in crude oil inventories, a weekly decline of 6.3 million barrels, one of the largest declines this year.
- The drop off helps chip away at the stockpile overhang, and it also erased about half of the buildup since June, which contributed to the recent plunge in crude oil prices.
- In fact, despite the volume of oil already sitting in storage, the buildup this year has been one of the smallest over the past five years, as Scotiabank Economics points out.
- That suggests that the market is heading in the right direction.
- The EIA report led to a pop in oil prices, and WTI and Brent have clawed back a lot of losses in the past two weeks.
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.
