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Goldman: Expect Another Bull Run In Oil

While oil prices are tumbling,…

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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Oil Prices Cool Down Amid Tanking U.S. Crude Imports

Whiting refinery

As yesterday's exceedingly mixed weekly EIA report is digested, oil prices are unwinding a good deal of yesterday's knee-jerk rally. As dollar strength further encourages crude lower, hark, here are five things to consider in oil markets today:

1) Yesterday's EIA inventory report yielded a large counter-seasonal draw to crude stocks, even though refinery maintenance is likely at its peak. Imports not only dropped off from Canada, but also to all three coastal PADDs (1,3 & 5). West coast crude oil inputs reached their lowest level since April 2012 (hark, below), depressing the need for crude imports.

(Click to enlarge)

2) With lower refinery utilization, less crude is being needed by refineries. Yesterday's EIA report showed PADD5 imports of 751,000 bpd last week. This is the lowest level since April 2013.

Our ClipperData show the leading suppliers to the West Coast this year. While Ecuador is the second-largest supplier, sending medium sour Oriente and heavy sour Napo grades, Saudi Arabia is leading the way in terms of volume.

But as our ClipperData illustrate, imports from Saudi Arabia have dropped right off this month, with just one delivery: 1,065,000 bbls of Arab Extra Light to Chevron's El Segundo refinery. Monthly deliveries of Arab Light and Arab Medium have made their way to the West coast for fifteen consecutive months, but here we are, two thirds of the way through October, and neither grade has been discharged yet.

(Click to enlarge)

3) While concerns swirl about Chinese output, the latest data from the National Bureau of Statistics show that producers have managed to stop the rot in September. As the chart below illustrates, Chinese production volumes managed to stabilize last month at 3.9mn bpd, ticking slightly higher than August's level. That said, output is still 9.8 percent lower on year-ago levels, down ~400,000 bpd. Refining activity also rose last month, up 2.4 percent to 10.7mn bpd.

(Click to enlarge)

4) The boys are back in town! Troubled Nigerian grades, which have spent much of this year in and out of force majeure, are finally seeing a turnaround in our ClipperData thus far this month. After being completely absent in September, Qua Iboe loadings are seeing a return to form, while Brass River, Escravos and Forcados are all up on last month's loading volumes. Bonny Light, however, has shrunk to a new low for the year.

(Click to enlarge) Related: Exxon CEO Contradicts Other Oil Executives: Doesn’t Expect Supply Crunch

The worst supply losses could be in the rear-view mirror for Nigeria. Now that flows are returning, however, the country's national oil company, NNPC, is slashing the price of its oil to boost sales and regain market share. Qua Iboe has been reduced by the most since 2014, while the majority of grades have had their OSP (official selling price) lowered by at least $1/bbl.

5) While much has been made of how low oil prices have dented Saudi's revenues, the charts below from EIA show the detrimental impact on Russia - and how weakness in the ruble has helped to offset this.

But while lower oil prices have crimped Russian revenues, Russian oil and gas companies have been less affected, given that lower tax rates have been paid due to lower crude prices. This has meant that the likes of Rosneft and Lukoil - Russia's two largest producers - have not had to slash their budgets like other large global producers have.

In fact, Rosneft in 2015 boosted its capex on exploration and production by 30 percent versus the previous year, while capex in the first half of 2016 was 33% higher than in the first half of 2015. Lukoil’s declined by 11 percent in 2015 compared to 2014, but is just 2 percent lower 1H 2016 compared to 1H 2015.

As strong investment continues, Russian oil production has reached post-Soviet era highs, and is expected to continue growing in the coming years as new projects come online.

(Click to enlarge)

By Matt Smith

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