Three hundred and thirty-one years after the birth of Johann Sebastian Bach, and the market is once again looking composed, despite its recent push to multi-month highs. As the WTI April contract rolls off the board today, it is trying to orchestrate one last rally; here are seven things to consider ahead of its timely demise:
1) The latest CFTC data show that short positions in WTI shrank again last week, dropping by 20 percent to the lowest level since June. In combination with a 2.4 percent increase in long positions, net-longs increased by 17 percent – to the highest level since last June. Once again, this increase shows ‘much less bearish’ positioning, as opposed to ‘much more bullish’. Nonetheless, net-longs march on:
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2) There has been little in the way of economic data out overnight – Russian unemployment remained at 5.8 percent, retail sales were better than expected at -5.9 percent YoY, the Eurozone current account was not as strong as expected – while in the U.S., existing home sales came in below par. Once again, there are a number of Fed speakers on deck today, giving insights into the U.S. economy, with the prospect of their rhetoric prodding the U.S. dollar around. We hear from Lacker, Lockhart and Bullard today. Related: Big Energy Discoveries Hold Huge Potential For Senegal
3) Signs of lower production in recent months is encouraging the bulls to believe that rebalancing in the oil market is underway. The chart below illustrates the total change in global production in the last six months, highlighting how the increase from areas such as Russia and the North Sea has been dwarfed by production losses from Brazil, North America, and OPEC.
While the OPEC losses are in large part transitory due to pipeline sabotage in northern Iraq and Nigeria, and while Brazil is expected to see a reversal of production losses in the coming months, the losses seen from North America may well be less responsive in their rebound:
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4) That said, no sooner than prices get within a whiff of forty dollardom, then talk of activation of DUCs (drilled but uncompleted wells) springs up. At various key shale areas in Texas, such as Eagle Ford, Wolfcamp and Bone Spring, there is a backlog of 600 DUCs. Related: Despite Fundamentals, Oil Surges Above $40
Yet while this number has dropped by as much as a third in the last six months, according to Wood Mackenzie, an increasing number could be brought online given the recent price rebound. Their return could also be spurred on by cash-strapped producers, desperate for cash flow. Either way, TIPRO estimates that the return of 660 wells in Texas could bring as much as 300,000 barrels per day of production back to market. As the chart below illustrates, DUCs are set to drop off considerably, as lower drilling activity leave the DUC backlog to be tapped instead:
5) While concerns have been stoked in recent months about the global oil glut getting pushed out onto tankers, this piece today highlights how the economics of floating storage have remained unprofitable throughout the last half a year.
Not only has the contango in the market refused to widen to such a point as to incentivize using ships for storage, but rising freight costs have also made it too expensive. E.A. Gibson Shipbrokers estimate that the cost of using ships to store oil for six months is now up to $6.80 per barrel, up 30 percent on a month earlier, while contango in the market remains decidedly muted, under $3/bbl from the second to the seventh month out.
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6) After it was announced last week that Saudi Aramco and Shell would be ending their 20-year relationship of joint ventures in the U.S., Saudi is looking to expand its footprint in the US. While acquisition targets have not been identified, the state-owned firm wants to buy more U.S.-based assets to guarantee demand for its crude exports. Related: The Unexpected Threat To Our Economic Growth System
7) The sentiment of maintaining a foreign footprint has been echoed by comments from Saudi Aramco’s CEO at the China Development Forum today in Beijing (h/t @JavierBlas2). He said that despite Saudi accounting for a strong share of China’s crude imports, ‘there’s a significant gap in what we are doing now, and what we can offer‘.
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As our ClipperData illustrate, nearly 30 percent of Saudi’s crude oil loadings last year went to the U.S. and China. The U.S. was the leading destination, with Japan second and China third. India and South Korea were fourth and fifth, respectively; these five destinations account for nearly two-thirds of all Saudi crude exports.
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By Matt Smith
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