Happy Nonfarm Friday! Better-than-expected job creation last month is supporting sentiment on this first Friday of February, and crude is being swept along with this, being boosted as well by the announcement of sanctions on Iran. Hark, here are five things to consider in oil markets today:
1) While we can see in our ClipperData that OPEC loadings to the U.S. in January have dropped off materially, we can see they have been strong into Asia. It is being suggested that a flood of light crude into Asia – not just from the usual suspects such as OPEC – but also from the likes of the North Sea, is set to pressure regional grades lower.
A narrowing in the Brent-Dubai/Oman spread late last year has served to incentivize Northwest European and West African crude to head to Asia; an ongoing trend of this narrowing in January is only likely to further encourage flows. While total loadings to Asia are up across the board in January, the rise in light crude is most pronounced, up nearly a million barrels per day versus last year’s average.
Loadings from the North Sea to Asia are up to the highest on our records, as China’s desire for bargain-hunting is being satiated by light Forties and Ekofisk grades.
2) The chart below shows Wood Mackenzie’s breakevens for new oil wells across various U.S. shale plays, and also in the Gulf of Mexico. While various additional factors have to be considered, including everything from transportation costs to administrative overheads and interest charges, the key takeaway is that breakevens are below market prices.
The example provided by Bloomberg is for the Wolfcamp Basin: if breakevens are $43/bbl, overheads and interest are $4/bbl and it costs $3/bbl to transport the crude, as long as oil is above $50/bbl, everything is hunkydory. Another thing to consider given the trend we’ve seen in recent years: efficiencies are only likely to improve, leading breakevens to drop even further.
3) Headlines alluding to strong OPEC compliance have been circling in recent days, with Reuters estimating compliance is at 82 percent, while Bloomberg is a little less aggressive at 60 percent. While we can see in our ClipperData that most producers appear to be cutting production via the medium of lower exports, to offset this we are seeing increasing export loadings in January from the triumvirate of Iran, Libya and Nigeria. Export loadings from the three in January are up nearly 500,000 bpd on the prior month.
4) Although a report from Fitch earlier in the week suggested that a default from Venezuela’s state-run oil company is probable, credit default swaps for Venezuelan government debt have actually dropped from a 59 percent likelihood of default in December to 44 percent this month.
This means the implied probability of nonpayment on Venezuela’s debt over the next twelve months has dropped below 50 percent for the first time since September, amid a cabinet reshuffle by President Maduro. (Mind you, there is still a 89 percent likelihood of default over a five-year period). The test will be in April, when $3 billion of debt repayment is due.
5) Should Venezuela run out of funds, one of the first shoes to drop will likely be its petroleum imports. Venezuela imports light crude and naphtha from the U.S., to use as a diluent with its heavy bitumen crude. Should we see these imports drop off, it may be the harbinger of an impending default. For now, volumes continue to be discharged.