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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 Slide On Strong Builds In Distillates

PBR rig

Happy middle O'week! After temporarily ripping higher in response to a surprise draw to crude inventories, oil prices are looking lower once more, as bearish builds from the products more than offset this. Hark, here are five things to consider in oil (and natgas) markets today.

1) About that EIA report. Even though refinery runs dropped, a relatively normal level of imports into the U.S. Gulf Coast - as opposed to a post-storm surge - has meant a minor draw to oil inventories. Nonetheless, a build to gasoline stocks amid lower runs and lower product supplied has helped to counter the bullish influence of the crude draw, a notion enthusiastically affirmed by a strong build to distillates. 

The distillate data is perhaps the most interesting. Total distillate Inventories increased by 4.6 million barrels, or 3 percent, to 162.8 million barrels. The majority of the build was seen on the East Coast, with a 3.5 million bbl build.

This build comes amid weaker distillate demand, and a recent drop-off in exports from the U.S. Gulf (as seen in our ClipperData here - in kbd, hark right).

Distillate inventories peaked at this time last year at 153 mn bbls, before being seasonally drawn down ahead of the winter heating period. But after a balmy winter in the Northeast (it's all relative, folks), consumers may still have more supply than usual left in their tanks, meaning we may see less drawn from inventories over the next two months than seen in prior years.

This poses the question: is this a sign of baton passing from an oil glut...to a gasoline glut...to a distillate glut?

(Click to enlarge)

2) The chart below is a great illustration of how OPEC / key producer jawboning really works. For the second time this year we have seen a swift, sharp shock of short-covering by money managers, ignited by production freeze chatter - lending support to prices.

As we approach another producer meeting at the end of the month - which is likely to come to nothing - the result of the meeting appears to be immaterial; the goal of Saudi et al appears to have already been achieved. Rinse and repeat in let's say, oooh, another four months or so? Related: Are Hedge Funds Positioning For An OPEC Disappointment?

(Click to enlarge)

3) IEA has released an annual report today on world energy investment. It estimates that global energy investment declined last year to $1.83 trillion, falling 8 percent. The drop was in investment in fossil fuels, which fell by $200 billion. Nonetheless, fossil fuels still account for 55 percent of the total.

Similar to OPEC's report on Monday, IEA sees upstream capex screeching lower this year by 24 percent, after dropping 25 percent in 2015. A third consecutive year of cuts still in the mix for 2017:


(Click to enlarge)

China's investment in its power sector meant it has regained the top spot as the leading investment market, spending $315 billion last year ($90 billion of this was in renewables-based power capacity), while the U.S. is in second place at $280 billion. Combined with the E.U., Russia and India, these five markets account for half of all global investment. Oil and gas still account for nearly half of all investment:

4) We have seen both OPEC and IEA revise up their expectations for non-OPEC supply this week. While this year's stubborn strength has come from the hunkering down of U.S. shale producers (think: Permian), next year's output optimism is being spurred on by Kazakhstan's Kashagan oil field.

After 16 years and ~$53 billion in investment, Kashagan is finally set to start production next month. While Eni - a partner in the joint venture - expects production to reach 370,000 bpd within a year, others are less optimistic.

Both Wood MacKenzie and the Kazakh energy ministry predict output to be a much more modest ~150,000 bpd. In fact, Wood MacKenzie predicts production will not reach ~370,000 bpd until mid-next decade. (I've made a note - let's revisit in a year and see who is right).

5) Finally, we discussed recently how PetroChina has been increasing its focus on natural gas production, despite slashing its investments into oil, with China looking to boost natty's share of the energy mix to 10 percent by 2020. This change in focus is not limited to PetroChina; we are seeing it play out across many of the oil majors. Related: Is China Deliberately Trying To De-Rail The Russia/Saudi Oil Deal?

BP expects ~60 percent of its production to come from natural gas by 2020, up from 44 percent currently, while Eni estimates ~70 percent of the output from new projects over the next four years will be gas. Total is planning to boost LNG production capacity by 50 percent by 2020, while as the chart below illustrates, Shell is now producing more gas than oil.

A focus on developing new markets through import terminals and infrastructure to increase natural gas consumption is driving this move; all the while, projections point to LNG production capacity increasing by 135 million tons a year to the end of the decade - a 50 percent increase in global supply.

By Matt Smith

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