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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 Slides As Iran Turns Down Saudi Offer

As the euro tumbles and optimism wanes from Algiers, oil prices are charging lower ahead of a likely build to crude inventories in tomorrow's weekly inventory report. Hark, here are five things to consider in energy markets today:

1) OPEC members are at loggerheads in Algiers, with it essentially coming down to Saudi's willingness to cut should Iran freeze its production - and Iran's lack of willingness to do so. Iran's oil production has leveled off in recent months around 3.6 million barrels per day, while our ClipperData show its export loadings have done the same, holding around ~2.5million bpd since May. Nonetheless, Iran continues to reiterate that it wants to increase its market share.

As the chart below illustrates, the majority of Iranian crude loadings are heading to four countries. China is the largest recipient, followed by India, South Korea and Japan. These four Asian nations accounted for nearly three-quarters of Iranian crude exports in the first half of the year.

(Click to enlarge)

2) The oil price drop of the last two years has forced U.S. producers into a 'survival of the fittest' mode. While over a hundred North American producers have declared bankruptcy in this latest downturn, many have exited bankruptcy in a stronger position. Meanwhile, a waning appetite for lending from banks has been offset by a greater enthusiasm from private equity funds to buy up distressed debt.

All the while, cost-cutting amid increasing efficiencies have dragged down the break-even prices for oil - now putting U.S. shale in the mix with Nigeria, Venezuela, Brazil and Angola at a range of $40 - $65 per barrel. The most impressive statistic in terms of increasing efficiencies comes from oil services provider, Halliburton, who has helped Eclipse Resources drill the longest shale well on record - 26,641 feet deep, and another 18,544 feet long.

(Click to enlarge)

3) The chart below is pretty telling, highlighting how Saudi Arabia now has a bigger fiscal deficit than Iran, after oil prices started dropping in 2014. While Iran is seeing a boost to coffers in the aftermath of the lifting of sanctions, Saudi has seen its fiscal deficit rise to 13.5 percent of GDP this year. Iran's deficit is less than 2.5 percent.

We discussed last week how Saudi Arabia's economy only grew by 1.5 percent YoY in Q1, while contraction could be on the cards for Q2. As optimism of a production freeze crumbles in Algiers, the Saudi government has just announced a different way to deal with lower oil prices - further austerity.

The state press announced yesterday that the Kingdom is curbing state employee allowances and canceling bonus payments, as well as reducing the salaries of ministers and members of the Shura council, in an effort to further trim its spending.

(Click to enlarge)

4) A plan in the Northeast under the guise of 'Marcellus 2.0' is underway, as the shale industry goes full throttle to market the region's gas. For many years, natural gas in the area has been constrained due to pipeline infrastructure being unable to keep up with the rampant increase in natural gas production.

The Marcellus and Utica shale plays - covering Pennsylvania, West Virginia and Ohio - have seen production volumes rise 17-fold in less than a decade, up to 22 Bcf/d earlier this year.

The chart below illustrates that 12.5 Bcf/d of pipeline capacity will be added in the Northeast next year. That is just shy of the total capacity added over the last four years.

Although drilling activity has dried up in recent years, with just 22 rigs drilling in Pennsylvania currently, compared to 109 rigs five years ago, the expectation for ongoing strong production means a ramp up in pipeline capacity in the years to come.

(Click to enlarge)

5) Today's blog out on RBN Energy is by ClipperData's very own Troy Vincent. He digs into U.S. East Coast crude flows, and how crude by rail is losing out to rising imports, as exhibited in the chart below. You can read it here.

(Click to enlarge)

By Matt Smith

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