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Saudi Aramco Makes Existential Bet On Oil

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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 Stabilizes On Falling Dollar

As financial markets are distracted once more by Federal Reserve Chair Janet Yellen, crude is not immune to this influence, making moves in response to the U.S. dollar's gyrations (crude up, dollar down). We'll choose to ignore this hullabaloo, and hark, consider six things specifically relating to oil markets today:

1) Even the world's smaller oil producers and exporters play a key role in the global oil market. Even though we consume some ~96 million barrels per day of crude, the market remains at the mercy of incremental daily swings in supply and demand.

The North African nation of Chad exports the majority of its oil production, with an average of ~130,000 barrels per day of its heavy sweet Doba grade making its way into the international market. In the last year and a half, Doba exports have made it to thirteen different countries across various different continents.

The U.S. is the world's largest consumer of oil, and is also the leading destination for Chadian Doba. As our ClipperData illustrates, the U.S. accounts for over 60 percent of Doba exports, with ~2.4 million barrels arriving on the US Gulf and East Coast each month.


(Click to enlarge)

2) Earlier in the week we discussed how drilling activity is on the rise in the Permian Basin, with its rig count up nearly 50 percent from its low in late April, now accounting for nearly half of all active U.S. rigs.

This relative optimism towards the Permian is being reflected through in increased E&P deals, with Blackstone the latest of such developments. Just as Permian rigs account for nearly half of the U.S. total, the same applies for spending; roughly half of the $25 billion paid for U.S. onshore drilling properties this year has been spent in the Permian.

As drilling costs have dropped by as much as half, and as horizontal wells can be drilled for nearly two miles - about double the distance from last year - Permian is continuing to attract interest:

(Click to enlarge)

3) It is not just Permian that is seeing an increasing number of oil and gas deals. According to Wood Mackenzie, there were $11 billion of deals made last month, with the last three months of activity being triple the amount of the three months prior. (hark, below). Related: Iran Lays Out Conditions For Joining OPEC Output Freeze

Deals are being made globally; ExxonMobil agreed to acquire InterOil Corp for $3.6 billion last month to get exposure to natural gas in Papua New Guinea, while Statoil purchased an oil block from Petrobras in Brazil for $2.5 billion.

As the upside for oil prices is set to remain in check into next year as oversupply persists, there will be plenty of opportunities for further purchases as distressed companies look to sell off assets, while bigger companies look to divest assets and fine-tune their focus.

(Click to enlarge)

4) Stat of the day is that 56 percent of this year's corporate defaults have come from oil, gas and natural resource companies. There have been a total of 117 global corporate defaults so far this year - up 60 percent year-on-year and the highest level since 2009 - and 65 of these are oil, gas and natural resource companies. Additionally, 31 percent of oil and gas sector high yield bonds are trading at distressed levels.

5) We've chatted a fair bit here at the good ship Clipper this week about stalling Chinese oil production, and the financial health of its leading producers. PetroChina, China's largest oil company, is looking to boost natural gas production to account for half of its output by the end of the decade - up from 34 percent currently (hark, below). This target is based on overseas projects, as well as domestic production. Related: Yemen’s Houthi Forces Claim Missile Hit On Saudi Aramco Oil Facilities

PetroChina's stance is part of China's broader theme of boosting natural gas in its energy mix; through liberalizing its gas market and implementing market reforms, it is targeting a 10 percent share of the total mix by 2020. PetroChina is targeting a 30 percent increase in its natural gas production by 2030, an increase to 300 million tons per annum.

(Click to enlarge)

6) The below chart (via Bloomberg) helps to highlight the downbeat domestic demand picture for China. PetroChina and Sinopec are the two largest oil companies in China, accounting for more than half of the market. After fuel sales were as much as 16 percent higher year-over-year in 2011, they are now basically flat lining: 

(Click to enlarge)

By Matt Smith

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