Crude is ripping higher into the weekend, as the ebb and flow of OPEC production cut expectations swing towards the bulls once more (the drop in Saudi export loadings this month are looking pretty tasty, it has to be said...). Stay strong, my friends, for the weekend awaits. In the meantime, hark, here are five things to consider in oil markets today.
1) There have been more stories circulating about the Chinese oil market this week than we can shake a stick at...but we'll have a go at highlighting some of the more interesting elements at play.
We talked earlier in the week about how Chinese domestic oil production is coming under pressure due to aging fields and lower capex. The latest data from the National Bureau of Statistics peg production last month at 3.97 million barrels per day, up from a seven-year low made in September at 3.8mn bpd.
Despite indications from Chinese oil companies such as Cnooc that they are set to boost spending this year, the below rebound may still be a dead-cat bounce.
2) With Chinese domestic oil production under pressure, and as refinery runs have reached a record ahead of tighter fuel standards - up 3.7 percent last year to average 10.86mn bpd - imports have correspondingly been boosted to meet this extra demand, as well as to propel strategic stockpiles emphatically higher.
Our ClipperData show that Chinese waterborne imports increased by ~600,000 bpd last year. All of this increase was absorbed by buyers in northern China - aka 'teapot' refiners:
3) Even though our ClipperData show total Chinese waterborne imports are at a record pace so far this month - a result of a towering wave of OPEC crude exports ahead of a coordinated production cut - imports into northern China are actually down. This is because their import demand is coming under pressure, and for a number of reasons.
One reason is because the government is cutting allocations to those refiners who didn't use their full crude import quota last year. Estimates currently peg the allocated import volume at just over 60 percent compared to last year, although additional quotas could be issued.
Teapot refiners were initially granted the ability to import crude by the Chinese government at the end of 2015, and although quotas have been renewed (albeit at a lower volume for some), the government has chosen to scrap their product export quotas.
Although the teapot refiners were only exporting a minimal amount of their production (<5 percent), they were selling their products into the domestic market, causing state-run companies in turn to find a home for their excess product volumes. This has been in the form of higher exports.
4) After a completely counter-seasonal increase of 418,000 bpd to refinery runs for the second week of the year, logic has prevailed in yesterday's weekly EIA inventory report as runs dropped by a whopping 639,000 bpd. Now it seems we are back on an even playing field, with runs down 221,000 bpd since the beginning of the year, heading lower in the coming weeks as refinery maintenance ramps up.
Even though this now makes sense over the two-week average, it does cause one to wonder as to the validity of last week's print.
5) Finally, there are signs that U.S. oil producers are looking to signficantly boost capital expenditure this year, as optimism for higher crude prices grows. According to Barclays, worldwide spending by oil and gas companies is set to rise by 7 percent.
This outlook is even brighter for the U.S., if recent guidance is anything to go by. Noble Energy, who just purchased Clayton Williams Energy this week, has said its capex will be up to $2.5 billion this year, up 67 percent from last year. Meanwhile, Hess has boosted it spending plan to $2.25 billion this year, up 18 percent.
As prices rebound, drilling activity has followed, with total oil and gas rigs up 67 percent from their low of last May (hark, below). According to the WSJ, spending plans across 12 U.S. shale producers show an average increase of 60 percent this year. On this basis, drilling activity should only continue to increase.