Market Currents: OPEC oil exports dropping to U.S.

Rather than rallying like Tom Brady and the New England Patriots, oil today is instead dropping faster than Lady Gaga’s mic, ushered lower by a stronger dollar and ongoing expectations of an amply-supplied market. Hark, here are five things to consider in oil markets today:

1) While OPEC’s export loadings to Asia were strong in January, we are seeing much lower flows destined for North America. Although December’s loadings were boosted by strong volumes from Saudi Arabia, our ClipperData show that total loadings last month dropped below 3 million barrels per day for the first time since August, as OPEC seemingly favors keeping its Asian clients well-supplied.

That said, with U.S. oil inventories just 17 million barrels away from last year’s record level, and with refiners moving into maintenance season, there should be few concerns about a lack of supply.

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2) As we shift into the second month of OPEC / NOPEC production cuts, the expectation of immediately tighter supply is pushing the Brent forward curve towards backwardation versus the 12-month forward price. This phenomenon – when near-term prices are higher than prices 12 months out – has been absent since 2014, when prices were back in the land of one-hundred dollardom:

 

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3) This situation of tighter supply is also spurring on record speculative bullish bets (highlighted above). The latest CFTC data showed net-long positions in WTI rose to their highest level since records began. We’ve expressed concern in recent weeks about these numbers reaching extremes – when they do, they tend to signal turning points for prices.

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4) In recent weeks we’ve been focusing on the potential impact to oil flows from a U.S. border tax. The chart below highlights who would be the worst hit by a 20 percent tax. While Mexico would be the biggest loser, it is important to note that countries as far afield as Vietnam, Malaysia and Thailand would also take a big hit too:

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5) Even though absolute demand is dropping from Japan, it is still the world’s largest buyer of LNG, importing 85 million tons of the stuff each year. LNG accounted for 44 percent of its power generation mix for the year ending March 2016, with Australia the leading supplier to Japan last year.

That said, our ClipperData show that three LNG tankers were loaded at Cherniere’s Sabine Pass terminal in December with a declared destination of Japan. Japanese utilities are now contracted to buy 14 million tons of U.S. LNG by 2020, which equates to about a fifth of total projected U.S. LNG exports.

Asia spot LNG prices are now at parity with UK prices, as Asian prices tick lower despite colder-than-normal weather forecasts over the next month and a half. Qatar has resumed production after recent maintenance, while flows are picking up into Europe, offsetting a loss of supply due to an outage at an Algerian export facility. Meanwhile, output is set to drop in Australia at the AP LNG project this month.

The below chart is a timely reminder where Europe gets its natural gas from. While Algeria is the third largest supplier, Norway is second and Russia is first at 37.5 percent.

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