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What’s Stopping An Oil Price Rally?

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Oil Rally Unwinds Ahead Of Inventory Data

Oil Rally Unwinds Ahead Of Inventory Data

One hundred and sixty-eight years to the day after Niagara Falls stopped flowing due to an ice jam, and ongoing skepticism about a coordinated oil production freeze is meaning bullish positioning is coming unstuck today. Here are eight things to consider on the day before the day before the day before April Fool’s day:

1) Overnight economic dataflow was kicked off by a mixed bag of releases from Japan. Household spending came in much better than expected (up 1.7 percent MoM), while unemployment rose to 3.3 percent and retail sales were below consensus at +0.5 percent (YoY).

With a consensus print for Eurozone money supply being the main release of note out of Europe, we switch focus to the U.S., and the big bad daddio of housing from the Case Shiller. Year-on-year, house prices rose 5.7 percent in January across 20 metro areas, seemingly in a ‘goldilocks’ zone (not too hot, not too cool). There’s something rather soothing about the below chart (are you with me? …err, guys?):

S&P Case Shiller house price composite, percent YoY

2) Today’s pun of the day goes to ‘wrong side of the fracks‘ from the WSJ. The graphic below illustrates how bond prices for oil and gas producer debt are driven by their location. For example, junk bond prices have held up best in areas such as West Texas – where the Permian Basin is located – given that low costs make it the most profitable drilling area in North America.

In contrast, producers in areas such as East Texas – which include the Haynesville, Bossier and Barnett shale plays for this study – have seen bond prices plummet to less than 12 cents on the dollar as operations are unprofitable. Related: Oil Prices Beyond WTI And Brent

The Eagle Ford shale play sits inbetwixt the Permian and Haynesville, both geographically and bond price-wise (hark, bond prices at 52 cents on the dollar). While some wells within a narrow band in the area show strong enough initial flows (>800 bpd) to be profitable at $38, much of the Eagle Ford needs a higher oil price to make economic sense.

(Click to enlarge)

3) From one challenging environment to another, we take a look at oil production in Kurdistan. As the chart below illustrates, Kurdish production started the year at over 600,000 bpd, and was expected to increase by ~150,000 bpd this year.

However, repairs last month on the Kurdish pipeline to the Ceyhan export terminal in Turkey disrupted flows. Although the pipeline has restarted, the national government in Baghdad has banned Kurdish crude flows on the pipeline given the Kurd’s refusal to hand over production volumes last year, instead choosing to sell the oil themselves:

(Click to enlarge)

Unless an agreement is reached between the Kurds and the national government, production could drop by as much as 200,000 bpd this year, not only due to lower production estimates from the Taq Taq oil field in Kurdistan, but also due to production being reined in by the Baghdad government, rather than export it through Kurdistan. Related: Why We Could See An Oil Price Shock In 2016

4) Following on from the above, according to our ClipperData, waterborne crude exports from Iraq continue to reflect the rising production we have seen from the country. Crude loadings from the al Basrah oil terminal are up year-on-year for the last ten consecutive months. Overall in 2015, crude loadings were 12 percent higher than the prior year, continuing to push on this month:

(Click to enlarge)

5) This presentation from the International Energy Forum has been doing the rounds on social media today (h/t@javierblas2), and highlights rather succinctly the dilemma faced by OPEC:

(Click to enlarge)

6) Meanwhile, this slide from the same presentation highlights how OPEC has ended up in this predicament. Persistent oversupply in the oil market has meant an unrelenting rise in OECD crude inventories in 2015 to above 3 billion barrels:

(Click to enlarge)

7) From one social media maven to another, and @JKempEnergy highlights today that the net-long position across the big three oil contracts is now 579 million barrels, closing in on a record of 627 million barrels set in June 2014. Related: The Current Oil Price Rally Is Reaching Its Limits

The last three times we have reached extremes in short positions (Mar 2015, Aug 2015, Feb 2016), we have correspondingly seen a swift, sharp short-covering rally to lift prices. Therefore, as the net-long position pushes on towards the record seen in mid-2014, it is prudent to remember what happened at that time – Brent was peaking for the year at nigh on $115, while so was WTI at $107.

(Click to enlarge)

8) Finally, we get the API report later today, with a likely solid build to crude stocks (h/t healthy imports, refinery maintenance), and a draw for gasoline (h/t healthy demand, winter blend destocking). Although our ClipperData show just 2 VLCCs arriving from the Arab Gulf last week (4million barrels of Saudi crude), volume waiting offshore has dropped considerably from over 30 million barrels seen the week before last, indicating ongoing strong crude imports.

By Matt Smith

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