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Matt Smith

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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 Up On Positive Comments From Saudis

Seventy-six years after Hattie McDaniel became the first African American to win an Oscar, and the crude complex is looking inspired today. Given it is February 29th, the crude complex is accordingly leaping higher on the expectation that the chances of retesting recent lows is gone with the wind. We shall see.

It’s been a fairly quiet start to the week in terms of economic data, with a few bits and bobs out of Europe, with housing data and the Chicago PMI out here in the U.S.. The Chicago PMI has had a terrible showing, dropping precipitously into contractionary terrain again. German imports were weak, while retail sales beat consensus on a month-on-month basis (+0.7 percent vs. +0.2 percent expected). Preliminary inflation data for the Eurozone pointed to a drop back into deflationary territory YoY, while the core print disappointed, but was at a healthier +0.7 percent.

In terms of energyland™ data, the latest CFTC numbers show short positions held by money managers fell, while net long positions increased. Speculative positioning was more bullish for Brent, however. Net long positions on ICE for Brent crude futures and options rose to the highest since records began in 2011:

(Click to enlarge)

It seems that we could finally see U.S. oil production losses starting to accelerate in the coming months, as broad-based cost-cutting from oil companies is set to impact productivity.

The #1 and #2 largest producers in the Williston Basin, Whiting Petroleum and Continental Resources, both announced in the last week they are halting drilling activity in the Bakken shale due to low prices. As the chart below illustrates, various drillers are projecting lower production for this year – from Apache Corp (11 percent) to Devon Energy (10 percent) to EOG Resources (4 percent). Related: Electric Vehicles Could Soon Reduce Oil Demand By 13 Million Barrels Per Day

Here at ClipperData, we project that oil production will continue to edge lower as we move through the year. Scott Sheffield, CEO of Pioneer Natural Resources, says that output at the Eagle Ford shale play is likely to drop to 1 million barrels per day this year. That is down from the peak of 1.71 million bpd in March 2015, and still some 20 percent lower than the 1.22 million bpd projected for March in the latest EIA drilling productivity report.

(Click to enlarge)

Nonetheless, oil and gas companies are still managing to raise cash through stock offerings. While Pioneer Resource’s surprise equity offering in early January raised $1.6 billion, we have seen eight other U.S. oil and gas companies raise cash in Q1 of this year. At the current pace, stock offerings could surpass last year’s record – an impressive result given the increasingly downbeat backdrop to the U.S. oil and gas landscape: Related: What Would Negative Interest Rates Mean for the Oil Market?

There were a couple of interesting data points out over the weekend to show the creaking of certain economies under the weight of lower oil prices. First up, Saudi Arabia’s foreign exchange reserves were reported to have dropped by $14.3 billion last month, down to their lowest level in 40 months at $594 billion. Saudi relies on oil for 70 percent of its government revenues; net foreign assets fell by $115 billion last year. Meanwhile, Petrobras has signed a deal with the Chinese Development Bank to obtain $10 billion in loans, in exchange for supplying crude to Chinese companies. Related:Oil Giant Cuts Budget By 80 Percent And Suspends Fracking

Finally, the term ‘rolling storage‘ has been thrust into the limelight. After thousands of railroad tank cars have been idled after the drop in oil prices has made crude-by-rail uneconomic, these empty cars are now being used for rolling storage (as opposed to floating storage). While the use of use of railcars for storage will likely be limited due to costs and safety concerns, there are opportunities arising as the U.S. oil glut pushes crude inventories to over 500 million barrels…and new 80-year highs.

 

By Matt Smith

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