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Crude holding around $40

Aug 3, 2016 10:19:08 AM EST
By: Matt Smith

Crude is rebounding today ahead of the inventory report, pushing aside oversupply fears for now. Hark, here are five things to consider in energy markets today:

1) There's quite a war of rhetoric raging at the moment betwixt bulls and bears as to whether the current price drop below $40 is going to continue. In the bear corner we have the compounding bearish influence of high global crude ddstocks combined with high product inventories, in addition to lesser disruptions. While in the bull corner, we have expectations that non-OPEC production is going to continue to drop, bringing the market into balance.

While it is a compelling argument that fundamentals will tighten next year, given the ongoing lack of investment in the oil patch across the globe, and the dearth of projects coming online as we shuffle into 2018, what is less persuasive is that we will experience a significant rebound as we exit summer.

The gruesome twosome of lower product demand and refinery maintenance look set to keep a lid on crude prices in the near-term. All the while we have U.S. dollar gyrations in the background, leaving bulls and bears more like a push-me-pull-you.

2) Two examples of the current bull-bear pull are being played out in regard to Libya and Nigeria. While Libyan production has been mired at ~350,000 bpd so far this year, expectations for rising production have been stoked by a merging of the country's two national oil companies, recent U.S. airstrikes on the IS stronghold of Sirte, and the potential re-opening of ports. But similar to the tale of the boy crying wolf, much of the market is skeptical about return of Libyan barrels given too many false starts in recent years.

The second example comes in the form of Nigerian crude production and exports. After sabotage to various oil pipelines and facilities earlier in the year, hopes have been intermittently stoked in recent months of an end to violence via talk of truces, only for further sabotage to quash these expectations.

In recent days, Nigeria has resumed payments to former militants in an effort to curry favor and curb further attacks. The government is trying to engage militants in a ceasefire after agreeing to pay 65,000 naira (or $206) per month to each of 30,000 ex-militants in the Niger Delta, who are now subsequently paid to oversee security in the region.

While skepticism surrounds a ceasefire, force majeure is in place for two key crude streams - Qua Iboe and Forcados. As our ClipperData illustrate below, loadings of these grades have dropped off considerably this year - now down to a new low:

Qua Iboe, Forcados loadings

3) The chart below shows how the January 2017 contract for natural gas is trading at a premium to October 2016 - especially in the context of the previous year - as concerns increase of a cold winter, and its detrimental impact on storage.

natural gas winter premium

After an El Niño-inspired mild winter boosted natural gas storage to lofty heights, a hot summer has led to a significant narrowing in the storage surpluses. At a current level of 3,294 Bcf, storage has narrowed to a 15 percent surplus to last year, after being as wide as 69 percent back in spring. The five-year average has narrowed to 19 percent, after being as wide as 54 percent.

As the prospect of a cold winter emerges, the 'widowmaker' - the premium on the March 2017 contract to April - is on the move. Although the premium is nowhere near what we have seen in previous years (oddly, I wrote about this back in 2014, nearly two years ago to the day), it is an indication of trepidation about colder times ahead, and shrinking storage levels.

natural gas widowmaker

p.s. it is called the 'widowmaker' given its propensity to see extreme volatility - leaving some traders in desolation.

4) Delta's Trainer refinery has made a choice between a rock and a hard place - written about in a company memo - by sacrificing profits and choosing to produce as much jet fuel as possible to save the airline money. While jet fuel margins are hurting the refinery's bottom line, it is a sacrificial act to lower fuel costs for Delta - the airline's top operating expense.

5) Finally, last week we discussed how coal prices are on the rise, and specifically in Asia. As China has cut back on production, it has not only been importing more, but it is also drawing down its inventories. The chart below illustrates this drop rather well. Lest we forget, China relies on coal for ~65 percent of its energy needs, accounting for nearly half of all global consumption.

coal stockpiles China

About the Author

Matt Smith

deciphers and distills what is most relevant across the energy complex into cohesive and pithy knowledge you can use. The belly laugh is a bonus.

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