Speculators Go Short As Demand Is Downgraded

Friday, September 16 2016

In the latest edition of the Numbers Report, we'll take a look at some of the most interesting figures put out this week in the energy sector. Each week we'll dig into some data and provide a bit of explanation on what drives the numbers.

Let's take a look.

1. EV charging stations power up

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- Automakers face the tough task of convincing consumers that enough charging stations exist to warrant the purchase of an electric vehicle. That should become easier as EV charging stations are finally starting to proliferate.
- There are now 14,349 EV charging stations in the U.S., according to the DOE, with nearly 36,000 EV outlets. ChargePoint, a California company, has roughly 30,000 outlets, which is more than double the number of McDonald's restaurants in the U.S., Bloomberg reports.
- But EV sales are still tepid. In the first half of the year, the U.S. sold 65,000 EVs, which is equivalent to the truck sales from just one automaker (Ford) for one month.
- Still, the upside potential is huge. Chevy is set to unveil its Bolt car later this year, a fully-electric vehicle with 238 miles of range, and a price tag of $37,000 before federal and state tax credits. They beat Tesla to the punch, with a mass market EV at a relatively affordable price. Tesla's car may come out next year.

2. Speculators go short

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- Speculators have recently grown more pessimistic about the trajectory for oil prices, closing out the large volume of long positions accrued at the end of August. Shorts have seen an uptick as well.
- The rise of short bets was the most in three months for the week ending on Sept. 6. Longs also fell, pushing the net-long position down 19 percent.
- OPEC is thought to have soured the mood for oil prices, with repeated hints about a production freeze. "The more they talk, the less people listen," Michael D. Cohen, an analyst at Barclays Plc, told Bloomberg.
- Looking forward in the near-term, guesses are all over the map for oil prices, with the glut of crude persisting. "The market will probably yo-yo in a range through the maintenance season but there's downside risk," Stephen Schork, president of Schork Group, told Bloomberg.

3. IEA downgrades demand

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- The IEA deflated optimism in the oil markets this week with a downgraded to its global oil demand forecast.
- The IEA said oil demand would grow by 1.3 million barrels per day in 2016, or about 100,000 barrels per day less than its previous forecast. The downgrade comes as the agency lowered its third quarter forecast for demand growth by 300,000 barrels per day.
- Growth in demand is now at a two-year low, ruining the bullish case for oil in the near-term. The IEA says supply will exceed demand through at least half of 2017.
- China and India are "wobbling," the IEA says, and refiners are lowering purchases of crude, putting a dent in global demand.

4. Energy investment suffers "unprecedented" decline

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- The IEA said that global investment in oil and gas plunged by 25 percent in 2015 to $538 billion, and will fall by another 24 percent this year to just $450 billion.
- The two-year fall is the first time in forty years that oil and gas saw consecutive years of declining investment. A third year of shrinking investment - 2017 - is possible.
- About two-thirds of the decline is due to cost deflation - cheaper oilfield services, equipment, etc. But the other third is because drilling activity has dried up.
- Net debt to equity ratios across the industry has almost doubled, the IEA says, with North American Independents "under severe financial pressures."

5. North America suffers worse

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- The more than $300 billion in investment cuts since 2014 have been disproportionately felt by North America, the largest region of oil and gas investment in the world. North America still accounts for one-third of total global oil and gas investment.
- But upstream spending in North America will fall by more than half this year from 2014 levels. The sharp drawdown in investment has occurred not just because shale wells have higher breakeven costs than conventional projects elsewhere, but also because time horizons are short - oil companies can cut back shale investment on shorter notice.
- The Middle East and Russia, on the other hand, have lower levels of investment (which largely reflects lower cost structures), but they have also seen much smaller reductions in spending.
- As private companies scale back, national oil companies (NOCs) attracted 44 percent of global upstream investment in 2015, a record high.

6. On falling costs, renewables capturing more market share

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- The IEA's energy investment figures - a loss of more than $300 billion in two years - is indicative of falling unit costs. In other words, the drop off in investment is partially due to cheaper equipment and labor.
- Unit costs for oil and gas fell by 15 percent last year, although there are questions about the industry losing some of those gains when drilling picks back up.
- The cost reductions for renewables is likely more durable due to improving technology. Onshore wind only fell 3 percent in 2015, but solar PV saw costs plummet by 19 percent.
- Renewable energy outpaced fossil fuels in the power generation sector, by a whopping two-and-a-half times. About 70 percent of the $288 billion invested in global electricity generation in 2015 was funneled into renewables.
- Moving forward, renewables are expected to continue to attract the lion's share of energy investment, at least in the electric power sector. Oil will still dominate the transportation sector.

7. Industry cuts opex

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- Capex cuts from the oil majors alone have erased about $50 billion in upstream investment over the past two years.
- But big oil companies are also cutting operating costs (opex) - opex has been slashed by more than 35 percent since 2014. Another 5 percent in cuts is expected by the end of the year, the IEA says.
- National oil companies (NOCs), or companies under state control, have also cut opex by nearly as much as the oil majors.
- Still, even the largest companies are not generating enough revenue from operations to cover investment and dividends. The oil majors have taken on more than $100 billion in debt over the past two years, pushing total debt for the world's largest oil companies to a combined $350 billion.

That's it for this week's Numbers Report. Thanks for reading, and we'll see you next week.