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US Demands For More Oil Could Backfire

The State Department’s request for…

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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Strong Buying Continues To Fuel Oil Rally

Offshore rig

It is International Ninja Day, and oil is stealthily climbing higher to another daily gain. As OPEC optimism abounds, prices push higher for a fourth consecutive day to start the new week. Hark, here are five things to consider in oil markets today.

1) While the majority of Iraqi crude exports leave from the south of the country through Basrah, production in Northern Iraq has ramped up significantly in recent years, with higher volumes traversing through the Kirkuk-Ceyhan pipeline. The 600-mile pipeline takes crude to the port of Ceyhan, before the light sour grade is loaded onto tankers and predominantly sent into Europe.

Kurdistan's regional natural resources minister has said that it sees no major impact on its crude oil production from the OPEC decision. The commitment to cut production has come from the Iraqi government in Baghdad, hence cuts are expected to come from the south of the country, not the north.

(Click to enlarge)

2) While it is too soon for the latest CFTC data to reflect the market's response to the OPEC decision (CFTC only reports up until last Tuesday), the forward curve is giving us a good indication of what has happened.

Short positions held by speculators have surely been closed out amid the post-OPEC meeting euphoria, while producers have snapped up short positions along the forward curve, hedging future production out over the coming years.

The most conservative hedgers, such as Pioneer Natural Resources, have already hedged 75 percent of production for next year. But last week's price pop has given the opportunity to others to lock in price certainty for the coming years at ~$55/bbl. Hence the forward curve has swiftly shifted to backwardation - where near-term prices are more expensive than those further out along the futures curve, as selling pressure pushes it lower.

(Click to enlarge)

3) The withdrawal of higher-denominated bills in India last month is having a huge ripple effect on its economy. The removal of higher-value currency notes in a country where almost everyone uses cash is causing the economy to slow. As we know all too well, all paths lead back to energy, hence the slowing Indian economy is set to impact oil demand growth. Related: Will Solar Stocks See A DotCom Style Bubble?

4) While on the subject of India, the chart below shows how increasingly reliant India is on foreign producers, and especially OPEC. As Indian imports continue to rise above 4 million bpd, some ninety percent of these inflows come from the cartel:

(Click to enlarge)

5) Finally, the chart below shows how jobs in the oil patch have reached their lowest ebb, and have started to turnaround - even without the gift of the OPEC production cut.

Data on the U.S. oil and gas industry is on a one-month lag, so the latest data is from October. It shows that unemployment is starting to improve on a year-over-year basis. 154,000 jobs have been lost in the sector over the past two years; the latest rally should ensure the sector's prospects continue to improve.

(Click to enlarge)

By Matt Smith

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