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STEO: Brent To Average $70 This Year

The Energy Information Administration expects…

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Oil Volatility Spikes On Rampant Uncertainty

Volatility has soared in oil…

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 Up 4% On Saudi Rhetoric

Actions speak louder than words. Nope, strike that and reverse it. Rhetoric from Saudi’s oil minister today is emphatically rallying crude prices, as Khalid al-Falih said Saudi would ‘take any action to help the market rebalance’. This is somewhat at odds with yesterday’s OPEC report that showed Saudi production had reached an all-time high. For a second day we find ourselves saying ‘Hum dee dum’. Hark, here are five things to consider in oil markets today.

1) ExxonMobil is trying to figure out how to export Qua Iboe, Nigeria’s largest export stream, by using an alternate pipeline. Qua Iboe is under force majeure, and is expected to be so for the next few months (some rumors are channeling Wyclef Jean, saying ‘Gone ‘Till November‘).

Our ClipperData below show how sabotage and supply issues have collectively hit certain key Nigerian grades, dropping export loadings from above 1 million barrels per day in January by 60 percent last month to just over 400,000 bpd. That said, total loadings have held up rather well, as alternate grades such as Agbami and Akpo have risen to the challenge to offset losses primarily in Qua Iboe and Forcados. Through the first third of August, there have been no loadings whatsoever of Qua Iboe.

(Click to enlarge)

2) IEA’s monthly oil market report has completed the triumvirate of monthly oil reports this week, and has fallen in line with the other reports by being tilted net bearish. It has trimmed its demand growth forecast for next year by 100,000 bpd to 1.2 million barrels per day, while keeping this year at +1.4 million bpd.

It reiterated what yesterday’s OPEC report said, highlighting rising Saudi and Iraqi production, but in contrast to OPEC, it saw OECD crude and product inventories rise last month, increasing to a record of 3,093 million barrels.

The agency does, however, expect to see a ‘hefty’ draw to crude in the coming quarter, as global production falls and refiners process a record amount. Nonetheless, the combination of both a crude and product overhang remain – these will take a good deal of time to be worked through, regardless of crude stock draws.

3) The chart below is from the IEA report, showing a swift drop-off in Chinese oil demand over the last three quarters (h/t@chris1reuters). This is affirmed elsewhere, with Chinese oil demand seen little changed compared to year-ago levels. Official data show refinery runs up only 1.9 percent this year, although Platts suggests independent refiners (aka teapots) could be producing an additional 400,000 bpd. Related: Gazprom Neft Ups Arctic Field Output

4) While oil companies slash their capital expenditures, investors have been targeting the oil patch in the search for yield. The relative high yield on energy debt has attracted an influx of investment in the last two years; private equity funds focused on energy have managed to raise $113 billion in the last nine quarters, looking to buy up the assets that no-one else wants. Related: Protestors Commandeer Key Exxon Asset in New Guinea

This provides a case in point how the U.S. is one of the best-positioned producers to weather the storm of low oil prices. Not only is shale production dynamic enough to be able to respond swiftly to price moves, but there is no lack of investors willing to buy up cheap assets or own distressed debt.

Private equity has seized the opportunity to buy up cheap assets from troubled companies, while also targeting loans and bonds – with an eye to gaining ownership in bankruptcy or restructuring. While banks have been cutting back on their exposure to riskier assets in the oil patch, private equity funds are increasingly providing liquidity…and boosting their profits.

(Click to enlarge)

5) Iraq is set to resume a number of projects developing domestic oil fields with BP, Shell and Lukoil, which should lead to oil output increasing by up to 350,000 bpd next year. BP has agreed to spend $1.8 billion, Shell has agreed to $0.74 million, and Lukoil is spending $1.08 billion. Current production is at ~4.6 million bpd, and is set to rise to 5 million bpd, while according to our ClipperData, exports were at 3.2 million bpd last month.

By Matt Smith

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