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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.
Ty’s Take. We are beginning to see the market tension between hedge funds / oil traders who typically focus on the short cycle where the news is bearish, and EIA data which shows over the mid- to long-term there is good reason to be bullish. I expect we will see this cycle play out over the next 90 days after which we should have a better picture of how well supply and demand is converging.
U.S. Oil and Gas Jobs in May were 26% lower than in October 2014
Employment in oil and natural gas extraction continues to decline from levels reached in the fall of 2014. Employment in the oil and natural gas production sector reached a high of 538,000 jobs in October 2014. Since then, oil and natural gas production employment declined 26%, a loss of more than 142,000 jobs through May 2016. The total decrease in production jobs is nearly three times the 51,000 jobs lost over a 13-month period during the 2008–09 recession. Not all production jobs are directly related to drilling—the majority of the jobs are actually for extraction or support activities, which include the operations of drilled wells, exploration, excavation, well surveying, casing work, and well construction. This also includes the maintenance of already producing wells.
Compared to October 2014, the peak month for employment in the sector, May 2016 crude oil production was 2% lower, while natural gas production was flat. The divergence between trends in rig counts and employment on the one hand and oil and the trends of natural gas production on the other are attributable to increases in production per new well in key regions, driven in part by advances in siting and drilling technology. For instance, new-well oil production per rig so far in 2016 has been more than twice its 2013 level in areas such as the Bakken, Eagle Ford, and Permian. Growing offshore crude oil production in the Gulf of Mexico has also helped to offset declines in Lower 48 onshore production.
Ty’s Take. Recently a RigZone.com report indicated that Investment Bank Goldman Sachs anticipates the oil industry will need to hire 100,000 or more workers when this agony ends. However, if that estimate is correct, we know that 52,000 or more jobs might have disappeared. And of course, that does not account for all of us in the service industry who have had to say good bye to friends and colleagues.
LNG Producers Face New Market Realities.
Buyers of natural gas are making moves to change the current pricing structure as they see an opportunity to lower their cost and introduce flexibility into a market largely dominated by big producers. Currently, most LNG contracts are long-term, indexed to crude oil prices, and prevent re-selling by purchasers. This has lead to an inability by purchasers to resale excess inventory and also lead to them paying higher prices. Ehile that model has given producers greater comfort in investing in large scale projects, those very projects now create excess supply thereby handing buyers the ideal opportunity in coupled with increasing U.S. LNG shipments, which are generally more flexible and priced off U.S. Natural gas prices, not crude oil.
Ty’s Take. This is an interesting development and one that we should monitor. I believe it may be good over the long term for the market.
Mexico Has Yet to Take a Single Drop of U.S. Crude
Ten months after Mexico asked for a special dispensation to import light U.S. crude, they have yet to actually take a single barrel. Even before the repeal of the U.S. export ban, Mexico won the ability to saw its own heavy crude for lighter crude produced from shale formations. Pemex says it does not make economic sense to bring in U.S. crude at current prices. But even if the potential for profit improves, it is unclear whether the Mexican infrastructure can handle imports into its ailing refineries. In fact, Mexican refineries are only operating at 60% capacity and had 35 unscheduled stoppages in the first quarter causing the country to boast fuel imports.
Gasoline and Diesel Stockpiles Reach Record Level
Worldwide stock piles of gasoline and diesel products have swollen threatening an oil price recovery. Typically, oversupply of these products would simply shift to other regions where profit margins can be maintained. However, there is simply no place for the excess to go as refineries have boosted production to take advantage of lower crude prices and more refining capacity has come online. While we have had a global crude glut for some time, the addition of a gasoline glut is relatively new.
Ty’s Take. Unfortunately we have a see-saw effect. When crude is low, refineries rush to make additional margin. But that same rush has now possibly slowed the recovery for oil. I still think that oil moves higher after the short term, but it adds credence to the middle for longer philosophy that I discussed in Ty’s Take last week.
Saudi Hits Record Output
Saudi Arabia boosted oil output to a record high in July according to statements they made to OPEC. The cartel as a whole also hit record output. Saudi Arabia pumped 10.67 million barrels per day of crude (the previous record was June 2015 of 10.56 million barrels per day). This was largely done to keep up with power generation needs the Kingdom has during the sweltering summer months when air conditioners are running on high. In total, OPEC pumped 33.11 million bpd, up 46,000 from June.
Ty’s Take. OPEC necessarily pumped more crude to satisfy the needs of its member states. While this has lead some OPEC members to again cry out for production caps, I do not see much movement on this front.
Saudi Oil Minister Hints at Rebalance
On August 11, 2016, Saudi Arabia’s oil minister Khalid al-Falih indicated that Saudi Arabia would “take any action to help” crude markets stabilize. The Minister saw the upcoming energy conference in Algeria in September, where OPEC members will informally meet and non-OPEC member Russia has said they will join any discussions as an opportunity to discuss stabilizing the market.
Ty’s Take. See my article on OPEC being released today. Any comment by a major member such as Saudi Arabia is going to gain a market reaction. But remember, so far Saudi Arabia has shown no signs of abating its current policy, and it is within Saudi’s economic interest to occasionally trickle out comments such as this one to send oil prices higher.
U.S. Crude Exports Since the Lifting of Export Restrictions
Since the United States removed its export restrictions in December of 2015, the number of countries receiving U.S. crude has risen sharply. In the first five months of 2016, crude oil exports averaged 501,000 bpd. So far, in 2016, sixteen different nations have received U.S. crude. Below is a list Ty’s Take. How lifting export restrictions will impact the United States is, over time, an interesting question and probably deserves an article of its own. In some ways, it will arguably be highly beneficial to our economy, but in other ways, it might be detrimental. One can reasonably argue both sides. But equally interesting is where it finds home – i.e. – what countries and refiners find it beneficial to buy light, sweet crude to mix with heavy crude to increase refining margins.
Motiva Refinery Fire Out
Shell’s Motiva Refinery in Convent, Louisiana caught on fire on August 11, 2016. The blaze is now out and no injuries are reported. The fire started in the heavy oil unit. The 225,000 bpd crude oil refinery produces a variety of gasoline blends, jet and diesel fuel, heating oil, propane, butane, fuel oil, and sulfur. The refinery is still producing and the extent of the damage is unknown at this time.
Greenspan Chimes In
Former Federal Reserve Chairman Alan Greenspan suggested oil prices probably bottomed at $40/bbl. Mr. Greenspan stated that its hard to imagine the price going lower, but stated it could. He sees oil trading in the $40-$50/bbl range over the enxt several years, but stated that price is enough to encourage new shale production in the U.S.
By: Ty Chapman
Five Star Metals, Inc.
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