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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 Slides On Shale Fears, Strong Dollar

Ticker: Fun and games for the next few days have been kicked off by the release of the monthly OPEC report, with a monthly IEA and weekly EIA report to follow tomorrow. Immediate oil prices are being ushered lower by a rebounding dollar, unwinding yesterday's rally, while signs of OPEC production cuts and rising U.S. shale are adding to a mottled outlook. Hark, here are five things to consider in oil markets today.

1) OPEC's January monthly oil market report has just been released. Oil demand growth has been tweaked higher for both this year, and last; up to 1.25 million barrels per day in 2016, and 1.16 million bpd for this year.

After dropping in 2016, the cartel sees non-OPEC oil production growing in 2017 by 120,000 bpd, although this was adjusted lower from 400,000 bpd due to downward revisions to Russia, Kazakhstan, China, Congo and Norway. There was an upward revision to U.S. production of 230,000 bpd.

In terms of OPEC production, changes of note for December output (according to secondary sources) have been from Saudi Arabia, who have cut the most, by 149,000 bpd, while Iraq has boosted by the most: up 42,600 bpd. Nigerian production dropped by 113,500 bpd amid maintenance, worker strikes and militant attacks, while Venezuelan production also fell, down 45,200 bpd.

Demand for OPEC crude is expected to increase by 0.9mn bpd this year. That said, it is only set to rise to 32.1mn bpd - still below production levels even if we see full implementation of production cuts (um, which we won't).

(Click to enlarge)

2) The below charts were one of the coolest things from today's monthly OPEC report - which was chock full of interesting tidbits (note to self: maybe revisit tomorrow). While the direct burning of crude has dropped off considerably in recent years, we still see a number of countries - notably Saudi Arabia - is still highly reliant on it for power generation.

Nonetheless, even Saudi's direct burn dropped off considerably last summer, as natural gas-fired generation has stepped up to the plate. Indonesia is the only country to be seeing a year-over-year increase:

(Click to enlarge)

3) We highlighted last week how discoveries of conventional crude dropped to the lowest level since 1952. According to Rystad Energy, offshore discoveries last year were 90 percent below 2010 levels; they peg total global oil and gas discoveries at the lowest since records began in the 1940s. Related: China Leads Unprecedented Drop In Asian Crude Production

The replacement ratio last year for liquids dropped below 10 percent; it was as high as 30 percent just three years ago. As the chart below illustrates, there have been key discoveries in countries such as Brazil, Norway and Russia. Brazil has led the charge, with huge discoveries at the beginning of the decade in the Santos and Campos pre-salt basins.

(Click to enlarge)

4) In the presentation of our six-month outlook last week, we highlighted how Brazilian oil production has not been affected by the price dip of the last two years, because its offshore projects take a much longer time-frame to come to fruition (as highlighted in the chart above).

Hence, just as OPEC and NOPEC are coming together to rein in production, Brazil is seeing the fruits of its labor via higher production from its pre-salt basins. The Energy Ministry said just yesterday that it may hold a second licensing round this year for its pre-salt basins, as it looks to raise cash.

As our ClipperData illustrates below, Brazil oil exports are on the rise, breaching 1mn bpd for the first time on our records. Related: 5 Energy Stocks To Watch In 2017

(Click to enlarge)

5) Finally, the spotlight has been firmly shone on the Permian Basin in the last day or so by three interesting developments. The first is that Noble Energy has bought Clayton Williams Energy for $2.7 billion, to grow its presence in the Permian Basin. The acquisition includes 71,000 acres in the core of the Southern Delaware Basin - part of the Permian.

Secondly, Exxon announced yesterday that it is exchanging $5.6 billion in stock for approximately 275,000 acres of Fort Worth, which will double its holdings in the Permian Basin. The deal is being done with the Bass family, with the prospect of an additional $1 billion in 2020, dependent upon how the acreage performs.

Finally, yesterday's drilling productivity report from the EIA projected Permian oil production will increase by 53,000 bpd next month, as the leading shale play has nimbly responded the oil rally in recent months:

(Click to enlarge)

By Matt Smith

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