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The Billion Dollar Oil Hedge That May Never Happen

Worries about the U.S., China…

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 Spike As Traders Anticipate Bullish Inventory Data

Two-hundred and nineteen years to the day after the washing machine was patented, oil prices are continuing to spin around support at the $48 level. As buying interest returns today ahead of the weekly inventory data as a result of an output disruption in Libya, hark, here are five things to consider in oil markets today.

1) Yesterday we took a look at total Iraqi oil exports, and how they are continuing to show strength - indicating a lack of compliance with the OPEC production cut. As total exports rise, imports to the U.S. continue to push higher. Arrivals averaged 433,000 bpd in 2016 - almost double the volume seen in the prior year. Imports so far this year are averaging over 500,000 bpd.

(Click to enlarge)

2) Mexico refinery output is rebounding, after dropping last year to its lowest level in a quarter of a century. Refinery throughput rose to 933,433 bpd in February, with gains seen at three refineries - Minatitlan, Cadereyta and Salamanca - while activity fell at Salina Cruz, Tula and Madero.

This rebound is helping product exports to level off, as our ClipperData illustrate below. That said, we should see product imports into Mexico gradually continuing to rise, as demand increases and Mexico's refineries continue to face operational challenges.

(Click to enlarge)

3) Saudi Aramco's market value could now be over $1 trillion, courtesy of a canny little tweak by the Saudi government. The kingdom has just announced that it is slashing the tax rate for the petroleum industry from 85 percent to 50 percent ahead of an IPO for 5 percent of the company. The tax cut will increase Aramco's after-tax income by 300 percent - propelling their valuation higher.

4) Yesterday we discussed how producer hedging could help keep a lid on U.S. prices next year, with producers having covered very little of their exposure. The chart below shows the average oil price for 2018 has now dropped below $50/bbl for the first time since November. Related: Shell’s New Permian Play Profitable At $20 A Barrel

As near-term prices are consolidating around $50/bbl, longer-dated prices are finding little impetus to rally amid upward revisions to production outlooks, robust inventories, and a lack of OPEC compliance.

(Click to enlarge)

5) There is an interesting graphic in the WSJ today, which suggests that the reversal of the Clean Power Plan (CPP) will have a modest impact on the fortunes of the U.S. power generation mix over the longer term.

Should the President sign an executive order to reverse the CPP today, the biggest beneficiary will be coal. Without the CPP, the energy department projects that coal-fired generation will rise by 2020, while natural gas-fired generation will drop. But given an ongoing bias by utilities towards natural gas, solar and wind, a shift away from coal seems destined regardless.

(Click to enlarge)

By Matt Smith

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