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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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Overoptimistic Money Managers Could Crash Oil Prices

Oil is getting tonked on this final Monday of the month, as broader market volatility is bringing out the bears. Signs of OPEC compliance continue to counter signs of life from US shale production, with shale winning the price war today. Hark, here are five things to consider in oil markets today:

1) Let's continue with our theme of U.S. crude imports that we kicked off with last week, in light of a potential Border Adjustment Tax (BAT). As we discussed last week, the U.S. still imports about 5 million barrels per day of crude by water, as well as receiving ~3mn bpd of land-based flows from Canada. Of these 5mn bpd of waterborne imports, just over a third are from the Middle East, about a third are from Latin America, while about 14 percent (~575,000 bpd) are from Mexico.

Even after the three leading sources of waterborne imports are discounted, the U.S. still imports the best part of a million barrels per day from various parts of the world, from crude grades as far afield as Russia and Azerbaijan, Australia and Indonesia.

The U.S. also pulled in over 22mn bbls from Northwest Europe last year; the East Coast pulled in light sweet Norwegian Ekofisk in 9 out of 12 months, while heavy sour US crude Captain arrived on the Gulf Coast for a half of all the months. There was even one cargo of Danish light sweet DUC delivered last July; 629,000 bbls was discharged at PAA's St. James terminal.

(Click to enlarge)

2) I have again pilfered this splendid chart from John Kemp (@JKempEnergy), which highlights that the net-long position held by money managers in WTI continues to push to extremes. As the prospect of a Border Adjustment Tax (BAT) would boost domestic prices (by boosting domestic demand, as it would put domestic crude at a discount to foreign grades), long positions have pushed to their highest level since mid-2014.

We highlighted last week the need to be wary when financial positioning reaches extremes. The last time net long positions were this strong was back when oil was peaking for the year close to $108; we all know what happened after that. (It tanked).

(Click to enlarge)

3) Oh go on then, let's revisit that BP Energy Outlook just one more time. The below chart provides a wunderbar one-stop shop to highlight the broader trends expected from LNG supply and demand over the next couple of decades.

From the supply side, the key takeaways are that Qatar is done with its export expansion (hark, the current leading source of global LNG exports), handing off the baton of supply growth to the U.S. and Australia. Russia also makes its presence felt as we move into the 2020s.

As for demand growth, it is all about Asia, and the usual suspects: India and China. LNG is projected to grow seven times faster than pipeline gas trade, accounting for a half of all globally traded natural gas by 2035, up from 32 percent currently.

(Click to enlarge)

4) While on the topic of LNG, let's stay there. On Friday we discussed how natural gas exports have been ramping up to Mexico, more than doubling in the last two years. Our ClipperData show that there have been ten cargoes from Cherniere's Sabine Pass terminal arrive at the Manzanillo terminal in the last five months, after not receiving a jot in the prior seven months after U.S. exports first started.

This month Manzanillo has received three cargoes, the same as last month, although monthly volume has reached a new high at 214,378 metric tons:

5) Last week we discussed how happy days are here again it seems for the supermajors, who have weathered the storm of low prices in the last two years without cutting their dividends. As this WSJ article points out, however, the supermajors are still cautious, holding back on boosting spending just yet.

Chevron, who just reported Q4 earnings, is cutting spending this year to ~$20 billion, while Total indicated last month that its spending will decline slightly on 2016's level to $15- $17 billion. Wood Mackenzie projects that the majors will reduce spending by 8 percent this year. Nonetheless, it also expects US independent producers to boost spending by 25 percent should prices hold above $50/bbl.

We've already highlighted in recent weeks how 12 US independent shale producers have boosted capex this year by an average of 60 percent. Continental Resources, one of the biggest players in U.S. shale, announced last week that it is boosting its capex by 75 percent from last year's level to $1.95 billion.

By Matt Smith

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