As we charge into the second half of the year, with a long holiday weekend stretching out in front of us, oil has pared losses and appears to be shutting up shop around yesterday's close. Hark, here are five things to consider in oil markets today.
1) While we watch for a ramp-up in Saudi production to meet domestic summer power generation needs, Iraqi exports are coming under pressure for the same reason. Our ClipperData show that waterborne exports from the south of the country have fallen below 3 million barrels per day for the first time since last September, and is showing lower year-on-year loadings for the first time since last June.
This trend is affirmed by Iraqi's state-run South Oil Company, who point to stronger crude supply to local oil refineries to keep up with demand for air conditioning.
2) With oil and gas capital expenditures at their lowest level since 2009, Rystad Energy projects that investment in is going to be focused on mid-sized and smaller oil and gas fields through the rest of the decade, as opposed to on mega-fields.
Rystad expects spending on smaller oil fields to rise by 12.5 percent a year through the end of the decade - double the pace of investment in mega-fields. Oil fields with less than 300 million barrels of reserves are expected to see spending grow at 16 percent per annum, while mega fields are expected to rise a much lesser 6 percent.
The logic for this switch? While mega-fields are increasingly harder to discover, focus has shifted towards shale plays - which are smaller, but potentially vast. Finance also drives this move: not only are shale plays predominantly in the U.S., where financing is still readily available, but shale opportunities have shorter time horizons, generating revenues sooner rather than later.
3) On the economic front, a new month means a new onslaught of economic data, and specifically global manufacturing PMIs. China kicked things off overnight, with the official manufacturing PMI coming in line with expectations, and showing neither contraction nor expansion at 50.0 on the nose. The Caixin PMI was below expectations, at 48.6 (vs. 49.1 expected).
Onto Europe, and the Eurozone print was promising, coming in above consensus and showing expansion at 52.8, as strength was seen across the board from Germany, France, Italy and Spain. Unemployment for the bloc dropped to 10.1 percent. Across to the U.S., and the ISM manufacturing print was similarly impressive, rising to 53.2.
4) The chart below is from the EIA today, highlighting that although renewables are on the rise, accounting for 10 percent of total energy consumption in the U.S., petroleum, natural gas and coal still account for more than 80 percent of consumption - and have done for over 100 years.
While coal consumption fell 13% last year (as we discussed yesterday), this has overwhelmingly been offset by rising natural gas-fired generation. As gasoline demand - the largest piece of petroleum consumption - increases to kick around record levels (think: low prices at the pump), petroleum consumption rose last year, after declining in recent years.
5) Finally, we also discussed yesterday how gasoline crack spreads were considerably lower for the time of year compared to the last half a decade, due to super-strong inventories. While we mentioned total U.S. gasoline inventories are 10% higher than last year's levels, inventories for the East Coast are even more pronounced, up 15% above last year's level.
Hence, as the chart below illustrates (h/t @laurablewitt), the spread betwixt August and September has dropped from its usual premium to a discount - underscoring the oversupplied nature of the market at the strongest demand period for the year.