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. Short positions on the rise
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- For the week ending on October 11, the number of short positions on WTI rose to more than 540,000 contracts, the highest since 2007.
- Producers take short positions to sell future production, locking in prices at some point in the future in order to mitigate risk. As the EIA notes, banks can require producers take such positions as a prerequisite for securing a loan.
- Aside from mere speculation, a rising number of short positions can be an indicator that producers are confident that they can make money at the current futures prices.
- But they also are a bearish signal for oil prices, lending weight to the notion that prices will not rally very much in the near-term.
2. Renewables overtake fossil fuels
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- For the first time ever, renewable energy added more electricity capacity across the globe than fossil fuels did. The IEA estimates that in 2015, 153 gigawatts of renewable capacity was installed, about 55 percent of the global total.
- About 500,000 solar panels were installed every single day in 2015, on average.
- The IEA expects renewables to make up 42…
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. Short positions on the rise
(Click to enlarge)
- For the week ending on October 11, the number of short positions on WTI rose to more than 540,000 contracts, the highest since 2007.
- Producers take short positions to sell future production, locking in prices at some point in the future in order to mitigate risk. As the EIA notes, banks can require producers take such positions as a prerequisite for securing a loan.
- Aside from mere speculation, a rising number of short positions can be an indicator that producers are confident that they can make money at the current futures prices.
- But they also are a bearish signal for oil prices, lending weight to the notion that prices will not rally very much in the near-term.
2. Renewables overtake fossil fuels
(Click to enlarge)
- For the first time ever, renewable energy added more electricity capacity across the globe than fossil fuels did. The IEA estimates that in 2015, 153 gigawatts of renewable capacity was installed, about 55 percent of the global total.
- About 500,000 solar panels were installed every single day in 2015, on average.
- The IEA expects renewables to make up 42 percent of the market by 2021.
- Much of the growth will take place in four countries: the U.S., China, India and Mexico. The EU has a lot of renewable energy, but its growth rate is a bit lower than the others.
- “We are witnessing a transformation of global power markets led by renewables and, as is the case with other fields, the center of gravity for renewable growth is moving to emerging markets,” IEA Executive Director Fatih Birol said.
3. Refining margins declining
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- The massive stockpile of refined products sitting in storage around the world continues to weigh on refining margins.
- Margins were down 42 percent in the third quarter compared to a year earlier, averaging just $11.60 per barrel. Aside from the first quarter of this year, refining margins in the third quarter were near their lowest levels in years.
- That is a stark difference from 2015, which was an excellent year for refiners. The falling price for crude combined with strong demand saw margins spike to $20 per barrel. But as refiners ramped up output to take advantage of that opportunity, they churned out record product. And as demand softened, inventories built up.
- Low refining margins will take away one of the few sources of strong earnings for the oil majors, which are set to report third quarter numbers in the next few days and weeks. Related: The Beginning Of The End For Europe’s Natural Gas War
4. Oil discoveries down
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- The collapse of oil prices has exacerbated a troubling trend for the oil industry: discoveries of new oil and gas reserves are in freefall.
- Exploration spending in 2015 was at its lowest level since 2007, the WSJ reports, and will fall again this year. The oil majors slashed about 35 percent from exploration spending in 2015 compared to 2013 levels.
- The volume of new discoveries was already declining, but the cuts to exploration budgets are accelerating that trend. Wood Mackenzie says that new discoveries in the past 2.5 years is less than the volume discovered in just 2012 alone. New discoveries are at their lowest level in 70 years.
- The oil majors are running away from the megaprojects that they sought a half decade ago. Frontier regions like the Arctic and ultra-deepwater are too expensive and had a questionable return even when oil prices were high. Indebted companies will increasingly focus on lower-risk shale reserves.
- The WSJ reports that Eni (NYSE: E), for example, is aiming to discover 1.6 billion barrels of oil between 2016 and 2019 at a cost of $2.30 per barrel, down from the 11.9 billion barrels the company discovered over the past 8 years at a cost of $1.20 per barrel.
- Today’s cutbacks and the dearth of new discoveries raise the possibility of a supply crunch in a few years.
5. Oilfield services turning a corner
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- The top oilfield service companies have managed to put a halt to the enormous job cuts that were forced upon them by the worst oil bust in decades. The four largest OFS companies cut 140,000 jobs over the past two years, according to the FT.
- But in the third quarter of 2016, employment figures remained about the same at Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL), the two largest firms, and only down by about 2,000 at Baker Hughes (NYSE: BHI), the third largest.
- The rig count is back up and oil prices have seemed to stabilize at $50 per barrel, with more work promised for OFS companies as drilling picks up.
- Schlumberger’s CEO Paal Kibsgaard struck a strong and optimistic tone in a conference call with investors, claiming that “we have indeed reached the bottom of the cycle” and are planning for the “recovery phase.”
- He also stated that Schlumberger would only look at profitable projects, a warning to oil producers who have demanded lower rates for services. Kibsgaard’s comments suggest that oil companies will no longer be able to squeeze savings out of service companies. Related: Saudis, Gulf OPEC Members Offer To Cut 4% Of Oil Output
6. OPEC deal is underwhelming
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- Even if OPEC somehow agrees to cut its collective output to the lower end of its proposed range at 32.5 million barrels per day, the deal would only cut into existing excess supplies by 11 percent, Bloomberg says.
- The cuts will bring global inventories down in 2017 by just 36.5 million barrels over the course of the entire year, which is hardly a game changer.
- Even that level of cuts could be too much to ask for OPEC – it would require reductions of 900,000 barrels per day below September levels.
- The problem becomes even more difficult as Nigeria and Libya are ramping up disrupted output. Iran too is targeting higher production levels. All three nations are exempt from the cuts. More recently, Iraq also demanded an exemption and is hoping to boost output.
- In short, even the best-case scenario for the OPEC meeting won’t be enough to spark a strong rally in oil prices.
7. Widening contango a warning sign
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- The spreads between near-term oil contracts and those for delivery a year out are widening again, a trend known as contango.
- The contango is a symptom of short-term oversupply, as crude for front-month deliveries need to be discounted because of the glut.
- In other words, the futures market is showing signs of a persistent glut, lending evidence to the notion that oil prices might not rally for quite some time. The IEA does not see balancing until the middle of next year.
- The WTI and Brent time spreads are at their lowest point since January – less than -$4.00 per barrel – a time when crude crashed below $30 per barrel because of oversupply fears.
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.
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