Oil Continues To Rally As Short-Covering Continues

Eighty-three years after the board game Monopoly was invented, and oil prices are not represented by the iron (they are not flat), nor by the hat (there appears no lid). Instead they are represented by the car, as the market is trying to accelerate higher once more. Hark, here are eight things to consider on this first Monday in March:

1) After the first-week-of-the-month data deluge, we get the usual dearth of economic data this week. Fortunately for us commodity-focused folks, we get key monthly reports from the EIA and IEA to keep us entertained.

Today we get the monthly EIA drilling productivity report, which should show production in the Permian basin holding up, while Eagle Ford and Bakken continue their decline. Tomorrow sees the EIA Short Term Energy Outlook, with insights into future U.S. production. We then have to wait until Friday before the IEA’s monthly oil market report, in which we will likely hear about the ongoing imbalance in the global market (regardless of what price action is doing). OPEC’s monthly report is not on deck until next Monday. Related: Ultra-Bearish Headlines As A Contrarian Signal For Oil

2) Oil prices are starting the week on the front foot, as the latest CFTC data highlights the ongoing theme of an unwinding of record short positions in the market. Short positions dropped in Friday’s data by 15 percent, or 25,639 contracts. Hark, this is the biggest drop in ten months. As the chart below illustrates, short positions are now at their lowest level since last November at 150,718 contracts. Nonetheless, although net longs increased because of the reduction in shorts, long positions actually edged lower; speculators are not necessarily turning crazy bullish on WTI…they are just turning less bearish.

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3) Financial positioning in Brent continues to be much more constructive, with ICE data showing the net long position for Brent has increased to a new record:

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4) Azerbaijan has been the latest oil producer to join the chorus of those willing to freeze their oil production to support prices. And much like the rest of the chorus, it is a token gesture given Azerbaijan’s oil production is in decline. It produced 830,000 barrels per day in January, down 4 percent on year-ago levels, while production this year is forecast to drop even further. Related: 3 Metrics on Picking Stocks in a Low-Growth Environment

5) It is amazing to consider that U.S. natural gas prices are reaching new 17-year lows at the same time that U.S. LNG exports are just getting going. The map below from the EIA illustrates the various stages of the projects that are underway in the U.S. In addition to Sabine Pass, which is the first terminal to start exporting LNG, there are a number of other terminals which are under construction: Cove Point, Maryland (0.82 Bcf/d), Corpus Christi, Texas (2.14 Bcf/d), Cameron, Louisiana (1.7 Bcf/d) and Freeport, Texas (1.8 Bcf/d).

Combine this with Sabine Pass’ permitted capacity of 4.16 Bcf/d, and LNG export capacity by 2020 will be 10.62 Bcf/d. That said, capacity is very different to actual volume. It is likely that much less, perhaps 7 – 8 Bcf/d, will be leaving U.S. shores at this point.

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6) According to its latest Five Year Plan announced over the weekend, China is delaying the completion of its strategic petroleum reserve beyond its original 2020 deadline. The leading emerging market has a target of accumulating ~500 million barrels by the end of the decade, enough to cover 90 days of net imports (in line with the IEA’s stipulation for its members). The process is in three phases, with phase one of 91 million barrels of storage already complete. Phase two is underway, with a capacity target of 168 million barrels.

7) While China may be the world’s largest importer of crude, India is vying for the crown of leading oil demand growth. While India’s economy looks in better shape than China’s, and as its car market is increasing at a rapid clip (set to be the third largest by the end of the decade), its trajectory of rising oil demand growth looks set to hold firm. Related: Horizontal Land Rig Count Summary 4th March 2016

Yet while China is the fourth largest producer in the world at ~4.3 million bpd, India’s situation is very different. It produces less than 800,000 bpd, while its need for imports continues to rise. As we highlighted last week, we can see in our ClipperData that Indian crude oil imports increased by over 20 percent in February versus the year prior, spurred on by domestic fuel demand, and the chart below illustrates that this trend is only set to continue over the coming years and decades:

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8) Finally, should we ask ourselves the existential question of ‘why are we here?‘ (from an oil perspective, of course), the chart below provides a nifty representation of why. While Libyan and Iranian production have been stymied by civil war and sanctions respectively since 2010, we have seen oil production increasing from a number of sources…with the U.S. leading the charge by a country mile:

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By Matt Smith

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