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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 Reverses As Dollar Spikes On Strong Job Report

Whiting Refinery

Welcome to another Nonfarm Friday! As job creation last month was much better than consensus (255,000 jobs created versus 180,000 expected, with an upward revision to prior data to boot), broader markets have a skip in their step, and are heading higher. Rising expectations of an interest rate hike return once more, hence a strengthening dollar is putting concrete boots on a third consecutive day of rallying for crude. Hark, here are five things to consider in oil markets today.

1) Ah, sheesh. Production freeze rumors again…really?! It is being reported that several OPEC members are reviving the idea of a production freeze (in their defense, why wouldn’t they? It rallied prices rather nicely last time round).

OPEC members including Venezuela, Ecuador and Kuwait are said to be behind this latest reincarnation. But just like previous endeavors, it seems doomed to fail, given key OPEC members (think: Saudi Arabia, Iraq, and Iran) persist in their battle for market share, ramping up exports apace.

As our ClipperData show below, exports from the three have been increasing on a year-over-year basis at a frenetic pace. Year-to-date through July, the three nations have increased exports by an average of 1.8 million barrels per day. Iran has seen the biggest increase, up 770,000 bpd YoY, while both Iran and Iraq are up over 500,000 bpd.

(Click to enlarge)

2) In the face of slumping oil prices and hence lower revenues, the world’s biggest oil companies have made a decision to defend their dividends to the hilt, choosing to service them by raising increasingly higher levels of debt.

Back in 2008 when oil prices were riding high in triple dollardom, net debt for Big Oil was $13 billion. Since then, it has risen tenfold to $138 billion, and is expected to continue rising further in the coming quarters. Even though companies are slashing capital expenditures…falling revenues are still outpacing them. The price drop since mid-2014 cannot be held solely accountable for the rise in debt, however. Even in mid-2014 net debt had risen to $71 billion.

(Click to enlarge)

3) Floating storage economics are creeping towards becoming more viable. Even though the contango in the Brent forward curve is still not particularly conducive, with prices six months out not much more than $2/bbl higher, shipping costs are continuing to drop. A six-month charter on a VLCC has now dropped to ~$28,000 a day, which equates to ~$2.50 a barrel. Economics are becoming attractive. Related: Activist Investors About To Shake Up The Oil Patch

4) As economic concerns persist about China, the below chart illustrates who has the most exposure to the world’s second largest economy. While Singapore, Taiwan and Vietnam are likely to be the worst hit, given their exports to China account for a large share of their GDP, countries such as India, the Philippines and Indonesia are much more immune.

Tourism is also playing an increasingly bigger role; Chinese tourists traveling internationally increased by 14.5 percent in 2015 to 35.4 million, spending $235 billion. Some 60 percent of this travel was within Asia.

(Click to enlarge)

5) We are seeing the return of RINsanity, as renewable fuel credits have risen over 30 percent in the last few months. RINs = Renewable Identification Numbers, and are created each time a gallon of ethanol or biodiesel is produced.

The government has set a biofuel quota that refiners and importers need to meet – by either blending fuel with ethanol or buying the aforementioned RINs. While refiners are facing the brunt of these costs, those that own retail gas stations are able to generate credits via blending biofuels. Those that do not, have to purchase the RINs with no offset. As the chart below illustrates, these refiners are expected to spend $1.8 billion this year on RINs. The price of RINs are rising on greater demand, as the EPA has once again set too high a mandated volume of ethanol to be mixed with fuel, similar to 2013.

(Click to enlarge)

By Matt Smith

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