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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 Tank As Chinese Economic Data Continues To Disappoint

Oil Prices Tank As Chinese Economic Data Continues To Disappoint

Today is Harry Styles’ 22nd birthday, and accordingly the crude complex is heading in one direction. (Down). We burst into February today, and get hit by a wave of global manufacturing numbers, as well as the ongoing debate re ‘will-they-won’t-they’ cut production. (they won’t).

China kicked things off overnight, setting a cautious tone with its worst official manufacturing print since August 2012. The Caixin manufacturing release also showed ongoing contraction from the sector, but in contrast was better than consensus.

Eurozone manufacturing was in line with consensus, boosted by Germany and Spain, held back by Italy and France. Japan was below consensus, but showing expansion; Brazil was above consensus, but showing contraction. The U.S. is on deck shortly, likely showing ongoing contraction too.

The crude complex is getting a solid dose of the WBWs (whoop-bang-wallops) today, as Chinese economic worries weigh and expectations of a coordinated cut wane. The latest CFTC data show an interesting quirk; not only did we see short positions cut (that bit isn’t so surprising), but we also saw speculative long positions increase significantly. This means that net-longs increased by the most (in percentage terms) since October 2010: Related: LukOil Back In Iran As Russia’s Output Faces Decline

 

The chart below is from this piece over the weekend, which takes a look at the historical contribution of the oil and gas sector to the U.S. economy. While in the late 1990s its share accounted for less than 1 percent of the economy (as the broader economy boomed), the deterioration of the sector in the midst of the great recession meant it was a drag on the economy in 2009. Related: Oversold Oil Markets Rally On Rumors Of OPEC Cut

Last year it accounted for 3.1 percent of GDP, but after providing a boost to the economy for the majority of the five-year period from 2010-2014, it has been dragging it lower for the last two quarters. That said, this drop doesn’t account for the offsetting benefit from lower fuel prices.

 

Nonetheless, while emphasis remains on the lopsided oversupplied nature of the market, global demand is continuing to see the benefit of lower fuel prices. Bank of America suggest (via Bloomberg) that the mother lode of wealth transference is underway. If the current price plunge persists, we will see the equivalent of $3 trillion a year being passed from oil producers to global consumers. Accordingly, the bank sees oil demand growth continuing to hold well above one million barrels per day, in a similar vein to our three musketeers – EIA, IEA, and OPEC. Related: Is Eagle Ford Making A Comeback?

Finally, it looks like things are going to get worse before they get better for the U.S. oil and gas sector. According to IHS, North American E&Ps have only hedged 14 percent of their oil production volumes in 2016. Small U.S. E&Ps have 47 percent of their oil production hedged for this year (at $74.31/bbl), while midsize U.S. E&Ps have 43 percent hedged (at $60.54/bbl); large U.S. E&Ps only have 6 percent hedged (at $53.85/bbl). This means 2016 is set to be a year of increasing financial stress on the sector, amid dwindling revenues…

By Matt Smith

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