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Will Weak Fundamentals Force Saudis To Action

Will Weak Fundamentals Force Saudis To Action

As oil rebounded from 2-week lows on intraday trading on Tuesday,  we will take a quick look at some of the critical figures and data in the energy markets this week.

(Click to enlarge)

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Related: $40 Oil Not High Enough To Save A Lot Of Drillers
Chart of the Week

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• Oil production in the UK actually increased a bit in 2015, after about two decades of steady declines.
• The additional 100,000 barrels per day came from new offshore oil projects that were initiated in 2012 when oil prices were much higher, plus extra oil squeezed out from existing fields.
• The collapse in oil prices has demolished investment in new projects, the results of which will be felt in the 2018 to 2021 timeframe, due to multiyear lead times. The number of new projects greenlighted in 2015 was less than half of the level seen in 2013 and 2014.
• As a result, beginning in 2018, the UK could see more severe production declines.

Market Movers

• The world’s seven largest oil companies only replaced about 75 percent of the oil that they produced in 2015, the first time in years that reserves essentially fell. ExxonMobil (NYSE: XOM) only replaced 67 percent of its production. Chevron (NYSE: CVX), Total (NYSE: TOT), and Eni (NYSE: E) replaced more than 100 percent, but the rest of the majors did not.
• Israel’s High Court shot down a proposal to regulate the natural gas industry due to a provision that would prevent major regulatory changes for 10 years. The Israeli government has a year to revise the proposal. The decision could delay development of the Leviathan gas field, a large deposit discovered by Noble Energy (NYSE: NBL) and Delek Group (OTC: DKDRF).
• Credit redeterminations are underway for many embattled shale drillers. Companies like LINN Energy LLC (NASDAQ: LINE) and SandRidge Energy Inc. (OTCMKTS: SDOC) have already maxed out their credit lines. Any cuts to credit lines for companies struggling to meet debt payments could force them into bankruptcy. Some analysts predict as much as a 30 percent cut to distressed shale drillers.

Tuesday March 29, 2016

Oil prices have hovered at $40 per barrel for much of the last week, as the markets try to avoid falling back after the strong rally since February. Investors see shale production falling and demand continuing to rise, which point to the ongoing oil market balancing. But it is unclear at this point if the rally from $27 per barrel in February to today’s price just below $40 per barrel is here to stay. Fundamentals, while trending in the right direction, are still weak. Related:Low Oil Prices Forcing Saudi Arabia To Modernize Economy

India to surpass Japan in oil consumption. India added 300,000 barrels per day in oil consumption in 2015 and is expected to continue to post strong growth rates. India is set to be the world’s most important country in terms of oil demand growth, taking that mantle from China as the Chinese economy continues to slow. The IEA expects India to consume 4.2 million barrels per day (mb/d) in 2016, overtaking Japan as the world’s third largest oil consumer. The Indian government is hoping to incentivize domestic oil production to help meet rising demand.

DOE approves wind transmission line. The U.S. Department of Energy gave approval to a $2.5 billion electric transmission line that would help bring wind power to the Southeast. The project, proposed by Clean Line Energy Partners, is a 705-mile transmission line that would carry 4,000 megawatts of wind power from Oklahoma to Tennessee. DOE used a statute that would override state objections to the project, which has bedeviled interstate transmission lines in the past. The decision will surely face lawsuits, but if all goes according to plan, the project could begin construction in 2017 and be completed by 2020.

USGS releases earthquake maps. For the first time, the U.S. Geological Survey released new maps that identify regions that are prone to “both human-induced and natural earthquakes,” whereas in the past only natural earthquakes were identified. The maps are significant because they depict a large shaded area right in the heart of fracking country in Oklahoma. The state of Oklahoma has suffered from a surge in seismic activity, which scientists have linked to wastewater injection wells. After several years of inaction, Oklahoma regulators have stepped up efforts to curb the practice.

Saudi Arabia loses market share. Over the past three years, Saudi Arabia has lost market share in nine out of the top 15 countries to which it exports oil, according to the FT. That comes despite a ramp up in production since November 2014. For example, Saudi Arabia’s share of China’s oil imports declined from 19 percent in 2013 to near 15 percent in 2015. Likewise, Saudi Arabia saw its market share in the U.S. drop from 17 to 14 percent over the same timeframe.

But Saudi Arabia is also prioritizing refined product exports, which fetch higher prices. It hopes to double refining capacity to 10 mb/d. Additionally, while Saudi Arabia may have lost market share in some places, it is also taking stakes in large refineries around the world, helping it to lock in customers for its crude.

Meanwhile, according to the latest data, Saudi Arabia’s cash reserves dwindled to $584 billion as of February as the oil kingdom tries to keep its economy afloat and preserve its currency. That is down from a peak of $737 billion in August 2014. Related: Was Russia’s Syrian Campaign Aimed At Turkish Energy Security?

Investors start shorting Texas banks. Short sellers have begun targeting Texas banks with ties to the energy industry, betting that damaged oil and gas drillers will impair their lenders as well. Short bets on regional banks in Texas increased by 35 percent so far this year. Energy loans typically make up only a small portion of most banks’ lending portfolio. But for banks where energy makes up more than 4 percent of their portfolio, their share prices have plunged more than 22 percent.

The Fed and interest rates. U.S. Federal Reserve Chair Janet Yellen will speak at the Economic Club of New York on March 29, and she could offer some insight into the Fed’s thinking. The Fed hiked interest rates in December and suggested that multiple increases would be forthcoming in 2016, but has taken a more dovish stance in recent weeks, suggesting that it could back off from those planned rate hikes. The U.S. dollar has depreciated a bit, contributing to a rally in oil prices.

Major gas discovery in Tanzania. The Dubai-based Dodsal Group announced a 2.7 trillion cubic feet natural gas discovery in Tanzania. The East African nation, along with its neighbor Mozambique, is aggressively pushing forward with energy exploration, hoping to not only meet domestic natural gas needs but also to become a trading hub and export LNG abroad. Dodsal Group expects to invest $300 million in Tanzania over the next two years. The announcement comes a few days after news reports surfaced that ExxonMobil is considering taking a 15 percent stake in an offshore gas project in Mozambique from Italian oil company Eni, a sign of interest in the region.

U.S. natural gas markets depressed. Natural gas storage levels are at their highest levels in years after near-record production and an unusually warm winter across much of the country. Winter is typically the time of year in which prices rise due to strong demand, but spot prices are below $1.90 per million Btu, off more than 22 percent since the start of the year. Much of the U.S. Northeast saw its warmest winter in more than a century. Now with natural gas markets starting the “injection season” – a period of low demand that results in rising storage levels – there is little prospect of a price rebound. Sub-$2/MMBtu natural gas could be here to stay for quite some time.

Sinopec sees profit drop 30 percent, but beats estimates. Chinese oil giant Sinopec reported a 2015 profit of $5 billion, a decline of 30 percent from the year before but a much better result than analysts had predicted. The state-owned oil company offset losses with its downstream division. China is expected to see its oil production fall by 3 to 5 percent this year due to low oil prices.

By Evan Kelly of Oilprice.com

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