Short Takes For Week Ending August 12, 2016

Hedge Fund Increase Net Long Positions

Crude has rallied a bit over the last two weeks. Hedge funds increased their combined net long position in NYMEX+ICE WTI by +18 million bbl to 98 million bbl in the week to Aug 9. Long positions rose +19 million bbl while shorts positions were up by +1 million bbl. The increase in long positions was the largest one-week increase since Jan 2016 and before that Jan 2015.

Ty’s Take. This is positive for oil markets and started before OPEC started flirting with a production freeze. I believe this shows increasing acknowledgement by traders that supply and demand are converging.    

Australia on Track to Become World’s Biggest LNG Exporter, but Faces Shortage

 Australia is on track to become the world’s biggest liquefied natural gas (LNG) exporter by 2019 but faces a shortage at home as states restrict new drilling onshore and CAPEX is cut. Gas prices spiked in July to about six times the price of Asian LNG as cold weather created a power shortage. The problem stems from producers agreeing to long-term export deals at a time when global prices were high that require continued export.

China on Track to Become World’s Second Biggest LNG Producer

China is poised to be the world's second largest shale gas producer after the U.S. by 2040, when it would account for more than 40 percent of the country's total natural gas production, the U.S. Energy Administration (EIA) said Monday. China has drilled over 600 shale gas wells in the last five years. The EIA estimates that the world’s natural gas production I sset to grow 62% by 2040 and shale gas is expected to be the largest component of that growth. Aside from the U.S. and China, Canada and Argentina are the other two countries with commercial shale gas production.

BP and Schlumberger Fight Over Pricing.

Oilfield services continue to be hard hit as service companies seek to regain some pricing concessions. The oil industry has cut over $1 trillion dollars of budget for 2015-2020 through workforce reductions, delaying projects, changing drilling techniques, and of course, squeezing service companies. While BP says its expects lower prices to stay, Halliburton and Schlumberger disagree – they say they have cut prices to keep business, and those price reductions will change once oil rebounds and drilling resumes. The CEO of Halliburton stated that “price negotiations have been a barroom brawl…But we believe prices will recover.” Ty’s Take. I firmly believe some service pricing will recover. The fact is that the current prices for oilfield services are unsustainable over the long-term. The question is when will that happen and to what extent?

Venezuela Losing Oil Output. Fast.

Venezuela, holder of the world’s largest crude reserves, is currently losing oil output at its highest annual rate in 14 years. The production decline is a result of lack of investment, mismanagement, and failure to pay suppliers. In the 12 months up to June, Venezuela’s crude output fell 9 percent to 2.36 million barrels per day, while the rest of OPEC boosted output by 4%. Venezuela’s rig count fell to 49 in July, the lowest level since the end of 2011.

GE Gets Bullish on Coal.

Last week we published that in the United States, king coal had been dethroned in favor of natural gas. This week, GE leaders said they can reap decades of profits from existing coal power plants, installing upgrades that will come in response to tightening emissions rules and utilities’ desire to boost output. GE sees potential growth in developing economies, like India where demand for power is growing and other sources of fuel remain expensive. Even as natural gas takes away market share, global electric production fueled by coal in 2040 is expected to be 23% higher than in 2012 as a result of increasing demand. Nevertheless, GE Power believes that most of its demand for its products will come from upgrading existing coal plans in the U.S. and Europe. While these plants lag behind natural gas in efficiency they are too vital to retire or it would be too expensive to change out turbines.   Ty’s Take. I still believe Natural Gas is the wave of the future. Its cleaner and we have demonstrated it can be produced cheaply.

ExxonMobil, Chevron and Hess to Bid Deepwater project.

ExxonMobil, Chevron, and Hess have announced their intention to bid jointly in an upcoming deepwater oil and gas tender planned by Mexico. ( The auction in December will involve ten deepwater blocks in the Gulf of Mexico. The area is thought to contain about 76% of Mexico’s perspective crude reserves, and Pemex does not have the technology to develop the field. A total of 26 companies have qualified to bid, and many are expected to submit joint bids. Ty’s Take. At least one person has asked me about the future of deepwater drilling. We are currently working on an article (hint! Hint!). I see this as encouraging and shows companies taking the long view.  

By: Ty Chapman

Five Star Metals, Inc.

Raising the Bar for Customer Service and Quality

Twitter: @FSM_TY

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The Week In Numbers for the Week Ending 8-19-2016
Where was CAPEX Cut the Most?