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Short Takes For Week Ending August 12, 2016

us crude oil exports

Hedge Fund Short Covering Probably Accounts for Recent Rally

Crude has rallied a bit over the last two weeks. Hedge funds and other money managers accumulated the equivalent of 374 million barrels of short positions by August 2, 2016 in WTI and Brent. There has been comparatively little change in hedge fund long positions over the same period. This has left oil prices vulnerable to sharp reversal if prices stop sliding or hedge funds try to lock in some of the profit.

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Changing Demand For Natural Gas

air conditioning demand graph
natural gas consumption
natural gas fired capacity

In By The Numbers for the August 05, 2016, we wrote about an interesting occurrence: a natural gas inventory draw during the middle of summer.

As we noted in the August 5, 2016 Newsletter, U.S. natural gas stocks fell 6 bcf for the week before to 3,288 bcf. This was highly unusual as we are in the middle of injection season so stock should be growing, not shrinking. Normally, we would see an increase this week (based on a five year average) of 54 bcf. In fact, this was the first summertime draw of natural gas in over a decade.

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The Week In Numbers for the Week Ending 8-5-2016

Each week, 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 Genspace, API, and EIA on Inventory Data. And we also throw in the rig count for good measure.

WTI Open on August 1, 2016:$41.35WTI as of 12:00 on August 5 2016:$41.55  Brent Open on August 1, 2016:$43.11Brent as of 12:00 PM August 5 2016$43.94  Natural Gas Open on August 1, 2016:$2.840NG as of 12:00 PM on August 5 2016:$2.780

On August 4, 2016, Genscape released Cushing Inventory data for this week. Cushing is the largest oil storage tank in the world, and is the settlement point for crude oil futures traded on the New York Mercantile Exchange. According to Genscape, Inventory decreased 89,071 barrels at the Cushing settlement point from the beginning of the week until August 2, 2016.

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Ty’s Take For Week Ending 8-5-16

While I normally focus on where the price of oil is going, what I am more interested in this week is the fundamental question so important to all of us to help plan our business and know when this downturn will end: what price does it take for drilling to resume and when does service pricing recover (i.e. when do we all stop the agony)? I wrote about this issue a few weeks ago, and I largely remain behind my original opinion. But this week we got a host of new information from Big Oil Execs about their predictions and plans.

In creating the article on Earnings, I reviewed hundreds of pages of transcripts from the various earnings calls (thank you to www.seekingalpha.com for all of your hard work transcribing the earnings calls). And while each company has their own opinion as to market conditions and what they foresee happening, I did glean a bit of insight and can tell you that there seems to be at least an undercurrent of consensus. I know the article on earnings is long and tedious, but I do strongly encourage you to read it to help develop your own opinion.

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Oil Majors Reported Earnings Last Week

Last week, Major Oil Companies reported earnings. Below is a list of the major oil and gas companies, and what they reported:

Eni (NYSE: E):Q2 EPS of -€0.27ExxonMobil (NYSE: XOM):Q2 EPS of $0.41 (misses by $0.23)Chevron (NYSE: CVX):Q2 EPS of -$0.78 (misses by $1.10)ConocoPhillips (NYSE: COP)Q2 EPS of -$0.79 (misses by $0.18Total (NYSE: TOT)Q2 EPS of $0.90 (beats by $0.16)Royal Dutch Shell (NYSE: RDS.A)Q2 EPS of $0.13Total (NYSE: TOT)Q2 EPS of $0.90 (beats by $0.16)Royal Dutch Shell (NYSE: RDS.A)Q2 EPS of $0.13BP (NYSE: BP): Q2 EPS of $0.23 (misses by $0.05)Pioneer Natural Resources (NYSE: PXD): Q2 EPS of -$0.22 (beats by $0.12)Suncor Energy (NYSE: SU)Q2 EPS of -$0.36 (misses by $0.15)Anadarko Petroleum (NYSE: APC)Q2 EPS -$0.60 (beats by $0.20)

(see: http://oilprice.com/Energy/Energy-General/Oil-Industry-Slammed-By-Disappointing-Earnings-Oil-Price-Plunge.html

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Short Takes

wellhead graph

This Week we are trying something different. As some of you may know, I review lots of articles to come up with those which I believe will be the most interesting for our customers. And then I try to combine them into a few featured articles. This week, I decided to provide you more of the articles I look at in summary form. Please let us know if you prefer the old format or the new one.

Saudi Arabia Lowering Price of Crude to Asia

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The Week In Numbers for the Week Ending 7-29-2016

Each week, 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 Genspace, API, and EIA on Inventory Data. And we also throw in the rig count for good measure.

WTI Open on July 25, 2016  $44.20WTI as of 12:00 on July 29, 2016 $41.34  Brent Open on July 25, 2016 $45.70Brent as of 12:00 PM on July 29, 2016 $43.31  Natural Gas Open on July 25, 2016 $2.779NG as of 12:00 PM on July 29, 2016 $2.895

 

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Ty’s Take For the Week Ending 7-29-16

Oil Fell This week and fell hard. But why? As we discussed last week, I remain bullish on the price of oil over the long-term as I believe supply and demand will converge sooner rather than later. In fact, during their earnings call the CEO of Anadarko Al Walker stated that he foresees sustained oil prices of $60/bbl for 2017, perhaps reaching that price point by Fourth Quarter 2016. And as we discussed in our earlier article Wood MacKenzie reported that 56 of the biggest oil and gas companies are cash flow neutral at U.S. $50.00 per barrel.

So, then why is oil and gas falling? First and foremost, I think it has to do with the gasoline inventories remaining so high. The announcement that refiners are moving to winter blend this early is a bit troubling. In addition, hedge funds are driving the market down by taking short positions. Overall though, oil may not be reacting as much as their negative bet would indicate. I think the market is also anticipating the typical refinery maintenance that usually starts in August and ends in October. This means that crude stockpiles may start building again and that creates some jitters in the market. Additionally, Goldman Sachs said $40-50 a barrel oil is here to stay until mid-2017. While the World Bank raised its outlook for the average 2016 price from $41 per barrel to $43 a barrel this week, it also indicated it believes oil prices will end the year low compared to current levels. These factors were negative for the price of oil.

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Some Bad News: Refiners Switching to Summer Blend and Hedge Funds Go Short

We got some bearish news on oil this week. First, some refiners stated that they are switching to from summer to winter blend gasoline. Without naming which refiners were switching, Reuters noted that several major refiners had switched from producing summer blend gasoline to winter blend. (http://www.reuters.com/article/us-usa-gasoline-flows-idUSKCN1040G1)

Generally, summer blend is considered more environmentally friendly but is more expensive to produce. The U.S. government allows refiners to start selling winter blend on September 15th. Usually, refiners switch over production to winter blend in August. Currently, gasoline stockpiles are at their highest level in 25 years despite U.S. motorists setting record demand during the summer driving season. However, with so much supply overhang, we see refiners switching to winter blend earlier.

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Oil Majors Cash Flow Neutral at U.S. $50.00 per barrel.

Last week, we discussed that 70% of future development is commercially viable when Brent Crude hits $60.00 per barrel. http://www.fsmetals.com/about-us/newsletters/so-what-does-the-price-of-oil-have-to-be-to-turn-this-around

This week we got a bit of more good news. Because of the large CAPEX cuts seen across the industry (reduction of 49%, or U.S. $230 billion relative to 2014 levels), fifty-six major oil companies will be cash flow neutral if Brent crude has an average price of $50.00 per barrel, and a growing list will be cash flow neutral at $40.00 per barrel.

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