Crude is easing lower on this last day of February, as other sources are endorsing what we said last week – that OPEC production and exports are on the rise. As gasoline weakness leads the complex lower, hark, here are five things to consider in oil markets today.
1) We highlighted last week that one of our key themes here at ClipperData for the first half of this year is the de-stocking of product inventories, given they are at such an elevated level. Another theme we are keeping a keen eye on is that of refinery output from OPEC kingpin, Saudi Arabia.
This is because we suspect that Saudi is looking to supplement lost revenues from the OPEC production cut by exporting more products. This theory is endorsed by Saudi Arabia’s refinery output, which reached 2.96 million barrels per day in December, the highest since records began in 2002:
2) We can see in our ClipperData that as Saudi refinery output increases, so do product exports. Export loadings so far this month of gasoline and distillates are up to 1.5 million barrels per day, tracking above year-ago levels, and seemingly on course to make a new record in the coming months.
Exports going forward may not only be aided by higher refinery output, but also by higher prices. It was suggested yesterday that Saudi is considering a 30 percent increase to retail gasoline prices, starting in the second half of the year. This effort to encourage more mindful consumption would likely quell gasoline demand growth going forward, leaving more to be pushed out onto the global market.
3) Two and a half years after oil prices swooned from above $100/bbl, petro-states remain in the winter of their discontent. Nigeria’s economy shrank for four consecutive quarters last year, the first time it has contracted for an entire year since 1991.
Lower oil prices have cut government revenue by about half, while a weakening currency (the Naira) has caused a currency shortage, propelling inflation to its highest level in over a decade.
Our ClipperData show that after declining through the first nine months of last year, exports have been showing upside (amid volatility) since then. Export loadings are up the best part of 400,000 bpd in the last two months; total Nigerian output is being reported at 2.1mn bpd this month, up 500,000 bpd what it reported to OPEC in January.
4) As the trading range of WTI and Brent remains narrow – and narrowing – the pressure is building for a breakout, like a kettle boiling on a stove. Hedge funds are confident it is going to pop to the upside, boosting bullish bets to a record. Meanwhile, producers have been taking the opportunity to hedge their future production – signaling their conviction that the next price move is to the downside (as well as signaling they are risk averse).
Although fundamentals remain on the back foot, with US inventories at a record and the globe still dealing with a flood of OPEC exports ahead of last month’s production cut, the expectation of a tightening market is convincing the bulls this market is going higher. With our ClipperData indicating that OPEC has ramped up exports in the last month to pre-agreement levels, the bullish case is less compelling.
5) Finally, the chart below from Rystad Energy shows how the average wellhead breakeven price for key shale plays has dropped over 55 percent from 2013 to 2016, with the biggest drop seen at Permian Midland (hark, 60 percent to $38/bbl). Due to a number of factors – higher average royalties, a differing decline profile and hydrocarbon split – Eagle Ford had one of the highest breakevens last year: