Friday December 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. Non-OPEC deal sealed, but cuts happening anyway
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- On December 10, OPEC convinced a group of non-OPEC producers to join them in cutting output, a deal that added fuel to the fire for oil prices.
- But the 558,000 bpd reduction promised by non-OPEC producers is much less impressive than it seems. Mexico, for example, said it would chip in 100,000 barrels per day in reductions. But its aging oilfields are declining anyway, with natural depletion expected to take cut into output by 180,000 bpd in 2017.
- Other cuts come from Azerbaijan (-35,000 bpd), Oman (-40,000 bpd) and Kazakhstan (-20,000 bpd). Azerbaijan and Oman also won’t have to do much to adhere to those commitments, as natural decline is taking hold.
- Kazakhstan is an uncertainty. The massive Kashagan oil field came online this year, and is ramping up production. The gargantuan project will add several hundred thousand barrels per day in output next year, raising questions about how exactly the country will meet its promised reduction.
- It’s a clever move by the countries involved, packaging expected reductions as a “production cut,”…
Friday December 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. Non-OPEC deal sealed, but cuts happening anyway
(Click to enlarge)
- On December 10, OPEC convinced a group of non-OPEC producers to join them in cutting output, a deal that added fuel to the fire for oil prices.
- But the 558,000 bpd reduction promised by non-OPEC producers is much less impressive than it seems. Mexico, for example, said it would chip in 100,000 barrels per day in reductions. But its aging oilfields are declining anyway, with natural depletion expected to take cut into output by 180,000 bpd in 2017.
- Other cuts come from Azerbaijan (-35,000 bpd), Oman (-40,000 bpd) and Kazakhstan (-20,000 bpd). Azerbaijan and Oman also won’t have to do much to adhere to those commitments, as natural decline is taking hold.
- Kazakhstan is an uncertainty. The massive Kashagan oil field came online this year, and is ramping up production. The gargantuan project will add several hundred thousand barrels per day in output next year, raising questions about how exactly the country will meet its promised reduction.
- It’s a clever move by the countries involved, packaging expected reductions as a “production cut,” which has succeeded in moving the market. Oil prices jumped more than 3 percent on the news.
- Russia will make up the bulk of the non-OPEC cuts (-300,000 bpd), but Russian output recently hit a post-Soviet high and Russia has only promised to implement the cuts gradually over the course of the first half of 2017, not immediately in January as OPEC has promised.
2. Inventories to draw down, or not?
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- The IEA released its latest Oil Market Report, concluding that the oil markets will come into balance in the first half of 2017 after more than two years of surplus. The OPEC deal has moved that timeline up from an original estimate of mid-year 2017.
- According to Bloomberg data, global oil inventories could decline by roughly 760,000 bpd in the first two quarters of 2017, taking a significant chunk out of what has become record high storage levels.
- At that rate, the world will draw down about 46 percent of the 300 million barrel surplus in global oil inventories.
- Of course, that hinges on OPEC and non-OPEC actually following through on their cuts. The U.S. EIA is much more skeptical. The EIA projects that inventories will actually rise by 0.4 mb/d over the course of 2017, a significantly more pessimistic take on both the effect of the OPEC deal and on the state of the oil market.
3. U.S. shale revival?
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- Oil prices are up well into the $50s per barrel for the first time since June, and are now at the highest point in about 18 months.
- But the U.S. rig count was already rising before the OPEC deal. Now shale companies are expected to accelerate drilling plans.
- According to Macquarie, U.S. oil production in the Lower 48 could rise by 500,000 bpd in 2017 if WTI rises to $60 per barrel.
- Many analysts expect oil to trade within a range of $40 to $60 per barrel for years to come. But even within this so-called “shale band,” small changes in prices matter.
- By 2020, the U.S. could have roughly 2 mb/d more in output if prices are $60 per barrel compared to if they are $40. In other words, the OPEC deal could spark a strong rebound in American oil production over the course of the next three years.
4. Third-party ownership of solar rising
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- Solar installations are rising quickly and one form of ownership is the third-party ownership model pioneered by SolarCity, now part of Tesla (NYSE: TSLA).
- SolarCity often requires zero upfront cost to install solar on a residential or commercial roof, with the tenants paying back the company in monthly payments. SolarCity, and other third-party solar operators, retain ownership of the panels.
- Of the 12.3 GW of total installed distributed solar power (not utility-scale) in the U.S. as of September, third-party owners like SolarCity accounted for about a third of that, or 3.7 GW.
- In the residential sector, third-party owners capture a larger share, about 44 percent of the total.
- Obtaining solar at little or no upfront cost is a major reason for the industry’s expansion.
- In the third quarter of this year, the U.S. solar industry posted record installations, adding 4.143 GW of new capacity, which works out to 1 new megawatt every 32 minutes.
5. Global oil demand slowing
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- The IEA expects global oil demand to average 1.4 mb/d this year, and 1.3 mb/d in 2017, estimates that are slightly up from a few months ago.
- But those numbers are down sharply from 2015 levels. Part of the reason is that China’s oil consumption is growing at a slower pace.
- A Bloomberg survey of experts finds that Chinese oil demand growth could fall by 60 percent in 2017. Some of that has to do with licensing and regulatory issues on Chinese refiners. Also, China’s strategic petroleum reserve is widely thought to be filling up.
- Michal Meidan, an analyst with Energy Aspects, told Bloomberg that Chinese oil demand could grow by just 5 to 9 percent next year, down sharply from the 11 to 14 percent growth seen this year.
- Bloomberg’s survey finds median estimates of 4.8 percent growth in China’s oil imports in 2017, down from 14 percent in the first three quarters of 2016.
- In short, oil producers can no longer count on blistering Chinese growth to soak up supply.
6. Capex actually rising for some shale companies
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- The two-year oil bust has hollowed out balance sheets, forcing dramatic cutbacks in spending.
- But already some companies are stepping up spending levels, hoping to take advantage of rising oil prices. In fact, it is the smaller independent oil exploration companies that are increasing spending, in contrast to the much larger oil majors.
- Chevron (NYSE: CVX), for example, plans on cutting 2017 spending by a staggering 28 percent, compared to 2016 levels.
- Concho Resources (NYSE: CXO), Devon Energy (NYSE: DVN), Murphy Oil (NYSE: MUR), and Noble Energy (NYSE: NBL) have all published 2017 guidance figures that are sharply up from this year, raising capex by double-digit percentages.
7. Free cash flow neutral for first time
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- Spending reductions, efficiencies, and a rebound in oil prices have helped improve the cash flow picture for U.S. independent oil exploration companies.
- Even during the heady days of triple-digit oil prices between 2012 and 2014, many independents were cash flow negative.
- But with companies running leaner operations, a survey of 50 U.S. shale companies by the IEA finds that on average they became cash flow neutral for the first time ever in the third quarter of 2016.
- In other words, shale companies – for the first time – can fully fund their operations and their dividends from cash flow.
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.
