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Energy Prices Killed Other Commodity Prices in 2016

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As we move into 2017 with what is beginning as a year of optimism, we are always happy to see some data that backs up our gut. According to a report released by the EIA on January 03, 2017, their analysis shows that energy outstripped other commodities for price growth in 2016.

The EIA used components of the S&P Goldman Sachs Commodity Index to compare a percent change since the first trading day of the year. (See full report http://www.eia.gov/todayinenergy/detail.php?id=29392). According to the report, the spot energy index in the S&P Goldman Sachs Commodity Index (GSCI) rose 48% since the start of 2016. In comparison, the spot FSCI for industrial metals rose 22%, for precious metals 8% and for agricultural products 5%. Below is a chart summarizing the movement:

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EIA Releases Annual Energy Outlook 2017

On January 05, 2017, the EIA released its Annual Energy Outlook for 2017, which includes projections through 2050. The full report can be read here: http://www.eia.gov/outlooks/aeo/pdf/0383(2017).pdf.

The EIA report effectively uses what is known as the reference case and then side cases to create its forecast. Generally the reference case projections assume trend improvement in known technologies along with a view of economic and demographic trends reflecting the current central views of leading economic forecaster and demographers. It assumes laws will remain relatively unchanged.

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Do Conflict Mineral Regulations Work?

Its that time of year again – when my inbox begins filling with emails from Schlumberger, GE, and many others asking me to fill out their conflict minerals forms certifying that our material is free of conflict minerals. To be candid, these forms and requests usually end up being put aside or finding their way to the bottom of my to-do list as everything else takes precedent. Until I get the follow-up email, and then I feel guilty for having completely forgotten about them.  

The last time I filled them out, I pondered what a great cottage industry had been created by these U.S. regulations. And I wondered to myself, as I started getting the requests in this year, does this do anything?

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Where Would Various States Rank in OPEC?

Markets are abuzz with speculation as to what will happen should OPEC cut production as they promise. Obviously, the big issues are how much of a dent it will make in inventories, will OPEC adhere to its promises, and will non-OPEC countries who agreed to help actually cut production as promised?

But one thing I was a bit curious about is where the U.S., and various states would rank if they suddenly joined OPEC. I am not saying this is even feasible, but I wanted to compare U.S. oil production to OPEC members so that we would have an understanding of just how large the role the U.S. as the new swing producer, plays in oil markets. The most recent data we have from OPEC is from their December monthly report which has production numbers from November 2016,. Since the cuts are not anticipated to take place until this month, this will allow us a bit of an unfettered look at OPEC’s production. A few caveats. First, as I mentioned in a prior article, OPEC doesn’t trust itself, and therefore publishes two different numbers. One is their self-reported number, and the second is derived from secondary sources. Those numbers do differ. For our purposes, I’m just going to use the secondary source numbers. Second, many OPEC members still claim that they are not producing at full capacity. Despite these persistent claims, I firmly believe most OPEC producers are producing at maximum capacity without further CAPEX – something current oil prices keep them from doing. So needless to say, there is some debate about whether how much more OPEC could actually produce given economic constraints.

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When Will We See OPEC Production Cuts?

One topic of some discussion is when will we feel the effects of OPEC (and non-OPEC) production cuts? Obviously, oil markets have already reacted to the cuts, driving up the price of Brent and WTI substantially since the announcement of the deal. However, key questions remain: will OPEC and non-OPEC members who agreed to cuts comply, when will we know if they complied, and when will markets reach balance?

The issue of compliance and when we will know whether OPEC and non-OPEC members have complied is a bit tricky. The United States is by far the most transparent country when it comes to production and storage numbers. As we have discussed numerous times, OPEC does not even trust itself – which is why it publishes the production numbers each country gives officially, and then numbers from secondary sources. These secondary sources, and how they are calculated, are fascinating and range from shipment receipts to at least one company that specializes in tracking tankers to help determine true production and export numbers.

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Surveys Are Backing Optimism

Recent reports add credence to our gut instincts that optimism is running high, and oil companies will likely increase spending in 2017. According to a report released by Barclays on Monday, January 09, 2017, oil companies are expected to raise exploration and production spending in 2017 by 7%, the first increase in three years.

The Houston Chronicle similarly reported recently that North American exploration and production companies will spend one-quarter more this year, leading global spending growth among oil and gas companies. U.S. shale drillers had cut spending 38% in 2016.

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The Week In Numbers for the Week Ending 12-16-2016

In each edition of the Standard, we strive to provide you a bare bones summary of what happened to the price of WTI, Natural Gas, and Brent Crude. In addition, we summarize the major reports from API and EIA on Inventory Data. And we also throw in the rig count for good measure.

WTI Open on December 05, 2016$51.4WTI as of 12:00 PM on December 16, 2016$51.59  

Brent Open December 05, 2016

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Ty’s Take for the Week Ending 12-16-16

This weeks Ty’s Take is going to be a bit of a hodge podge – so let me begin by apologizing for any stream-of-conscience style writing. I promise I will do my best to keep it organized and relevant.

Like a lot of business owners, I spend a tremendous amount of time planning for the future. And this is particularly true for us at Five Star in month of December each year as we finalize budgets and forecasts for the next year. We project business levels, profit margins, costs, hiring requirements, and a host of other factors knowing all the time that we will be wrong – the question is how close can we get.

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Other Countries Join OPEC Freeze

Outline of The Deal

Well, maybe we got a Christmas Miracle. In a ‘historic’ deal eleven countries agreed on Saturday, December 09, 2016, to cut their output along with OPEC in a further effort to bring oil markets into balance. Between these 11 countries and OPEC, they represent more than half of the global oil production.

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Optimism Runs High In Wake of Historic Deal

Even before the OPEC deal to cut production on November 30th, and the subsequent agreement by non-OPEC members to join in the freeze/cuts on December 9th, optimism was running high in the oil industry. As you might recall from our earlier articles on earnings, several major OEM CEOs were calling bottom and talking about recovery. The Saudis, prior to the OPEC meeting, were declaring that oil markets would reach balance regardless of market intervention by OPEC. Yes, optimism was high before the meeting and is even higher now. Here is a look at some of the things we know.

In addition to the production cuts by non-OPEC producers discussed in this week’s article about non-OPEC members joining the freeze, we got the good news from Saudi Arabia that it was willing to cut deeper if necessary. As I mentioned in that article, this is huge and I will discuss in this week’s Ty’s Take the Saudi’s ability to cut further and why I think they will adhere to the agreement. But it tells me the Saudis are serious. And that is what matters.

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