Short Takes may or may not be a continued weekly column. However, I felt that since I have been gone for two weeks and we have not published a Five Star Standard, I would update you all on some of the major news items that occurred while I was gone.
Recent Hedge Fund Activities
Below is a summary of the Hedge fund activities as it relates to oil over the past several weeks. This information is important because we can glean some perspective on what the big money folks as a colletive think is going to happen. I receive a weekly summary so I have provided you that summary for each week. But to summarize as it applies to WTI, the bullishness of August seems to be giving away to a September bear. We will know more next week.
For the Week ending August 23, 2016. Hedge funds raised their combined net long position in Brent + WTI by +120 million bbl to 628 million bbl in the week to Aug. It was the 7th largest net long position on record and just -35 million bbl (-5%) below the record net long position of 663 million bbl set on Apr 26. Hedge funds increased their net long position in Brent + WTI by a record +120 million bbl in the week to Aug 23, beating the previous weekly record of +118 million bbl set only the previous week. Hedge funds’ net long position has increased by +287 million bbl (+84%) in the space of just three weeks.
For the Week Ending August 30, 2016. Hedge funds cut combined net long position in NYMEX+ICE WTI by -21 million bbl to 220 million bbl in week to Aug 30. Reduction came after net long position was increased by +161 million bbl over previous three weeks. Nearly all the adjustment came from profit-taking among the longs with long positions cut -24 million bbl while short positions were also trimmed -3 million bbl.
Hedge funds appear to have paused or completed the fourth short-selling cycle in NYMEX WTI since the start of 2015. WTI short covering rally seems to have run out of steam in the week ending Aug 30 after the blistering pace of the previous two weeks. Hedge funds and other money managers reduced short positions by just -1.7 million bbl to 95.3 million bbl in week to Aug 30. Previous two weeks had seen hedge fund short positions cut by -66 million and -57 million bbl.
Hedge funds boosted net long position in NYMEX+ICE US natural gas by +534 bcf to 1,476 bcf in the week to Aug 30. Largest one-week increase since Dec 2013. Largest net long position since Jul 2014. Adjustment split evenly between long side of the market (+280 bcf): and short covering (-254 bcf).
For The Week Ending September 6, 2016. Hedge funds cut their combined net long position in NYMEX+ICE WTI by -43 million bbl to 178 million bbl in the week to Sep 6. WTI net long position was cut for the second week running. But unlike the previous week, which was driven by long liquidation and profit-taking after a strong rally, the most recent reduction in net long positioning was driven by fresh short sales. Hedge fund short positions increased by +39 million bbl while long positions were reduced by -3 million bbl. Contrast with the week ending Aug 30, when long positions were cut -24 million while short positions rose just +3 million. Hedge funds increased short positions in NYMEX WTI by +35 million bbl to 130 million bbl in the week ending Sep 6. First increase in short positioning in four weeks. Unclear whether this is the start of a new short-selling cycle.
Major Supply Developments / Announcements:
- The U.S Geological Survey (USGS) completed an assessment of shale-gas resources in Karoo Province in South Africa and Lesotho. It is estimated the field could hold 44.5 trillion cubic feet of natural gas.
- BP has grabbed a second contract with China National Petroleum Corp. to explore, develop and produce shale natural gasi n the Sichuan Basin. The contract covers a 621 square mile area. BP's latest Energy Outlook, issued in February, forecast that by 2035, shale gas would account for one-quarter of the total gas produced globally, and China would become the world's largest contributor to growth in shale gas production.
- Caspian Sea Oil fields will add another 200,00 bpd to global supply in 2016. Supply of 75,00 bpd will start in October, climbing in the range of 150,000 to 180,00 in November and December.
U.S. Federal Regulators Warn of Subsea Bolt Failures
The U.S. government’s top offshore drilling regulator warned subsea oil drillers and equipment manufacturers that bolt failures in the Gulf of Mexico could result in a spill on the scale of the BP disaster. Regulators and makers of the equipment, including GE, Schlumberger, and NOV are trying to determine what is causing the problems, which have been found on safety equipment (including BOPs). In fact, GE issued a glove recall after a failure in the Gulf in 2012.
U.S. Power Plants Burning More Natural Gas
U.S. power producers burned an unusually large amount of natural gas in June and it is anticipated that July will report record volumes. Power producers burned 1,011 billion cubic feet in June 2016, a 9% increase from June 2015. This increase is a result of more gas-fired power plants as well as higher capacity utilization. Year over year, the number of gas-fired power plants increased by 11 (1.2%), but the overall amount of power generated rose by 2.3% for the same period. During the same period, coal capacity declined 5% and the utilization rate for coal generating equipment fell from 62.5 to 60.6%.
U.S. Gasoline Stockpiles Are Looking More Manageable.
Much of what has held oil lower recently was the emergence of an apparent gasoline glut – that is to say that gasoline stockpiles in the U.S. appeared extremely high which has caused concern over oil consumption rates. However, new data suggests that although U.S. gasoline stockpiles remain at record highs for this time of year, the excess inventory is much smaller when adjusted for the higher level of domestic consumption and export. Stocks of gasoline and blending components stood at 232 million barrels near the end of August, down from a high of 259 million in February but well above the 214 million reported at the same point in 2015. While gasoline stockpiles started the year with 30 days worth of consumption in storage (the highest level since January 1999), once adjusted for revised consumption, August stockpiles were only 13 million barrels higher than normal, or about 24.4 days of consumption. This may lead one to conclude the gasoline glut is a bit overstated.
Oklahoma Concerned About Link Between Major Earthquake and Disposal Wells.
In the wake of a 5.6-magnitude earthquake that struck central Oklahoma on September 3, 2016, State regulators ordered 37 wastewater disposal wells shut down. Commission spokesman Matt Skinner said the wells were directed to shut down due to scientific links that the increase to the underground disposal of wastewater from oil and gas production induces earthquakes. The commission has previously asked producers to reduce wastewater disposal volumes.
U.S. National Park Visits Up.
Visits to U.S. National Parks gives us a bit of a proxy for gas consumption because of the strong tendency of visitors to drive to the destination and as an overall indication of the level of participation in summer driving season. The most recent nearly complete data are for July. The August numbers are still missing quite a few smaller sites, as they have not yet reported. For July, visitor numbers were up by more than +4 million, almost +10%, compared with the same month in 2015. The implication is that leisure-related driving and fuel demand remained very strong over the summer months, despite the heat waves.
Iranian Oil Production Stalls.
After step output growth over the last three months, Iran has run out of steam. Iranian oil ouput grew by 800,00 bpd after sanctions were eased on Tehran in January. But since the initial surge from January to June, Iranian oil production has actually fallen. Iran seeks to add another 500,000 bpd to its production to return it to pre-sanction levels. However, it should be noted that in August, Iran set a record export amount despite the stalling production.
Probability of La Nina being present during winter 2016/2017 Cut.
U.S. government forecasters have cut the probability of La Nina being present this wintert 36% compared with 76% at the time of the May forecast. The most likely outlook is currently for ENSO-Neutral conditions, with a probability of 56%, up from 21% in May. This impacts natural gas prices as La Nina cools temperatures and therefore drives demand for heating oil as well as natural gas power. If the world experiences a prolonged La Niña, the potential upside for natural gas prices is enormous. For example, during the 1998-2001 La Niña, prices eventually rose to close to $10/MMBtu –a 500%+ rally from their 1997-98 El Niño lows. However, it took a substantial drawdown in storage levels to get them up there. A La Nina now may be even more significant as we have discussed in prior editions of the Five Star Standard in light of increasing us of natural gas for power gen.
By: Ty Chapman
Five Star Metals, Inc.
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