Market Currents: Saudi talks production freeze, while flooding China with crude

Eighty-six years after New York installed its first traffic lights, and the crude complex has been given the green light to rally today, showing no sign of stopping thus far. The initial impetus for today’s push higher has been renewed optimism for a coordinated effort to stymie the current oversupply in the global market.

Venezuela’s oil minister is carrying this beacon of hope, having revealed Russia, Saudi, Venezuela and Qatar will meet next month to discuss efforts to stabilize the market. While skepticism swirls around these developments, once again we are seeing such rhetoric spurring on a bout of short-covering.

From a ClipperData state of mind, it is tough to bridge the gap between the rhetoric we are hearing from various oil ministers and what we are seeing in our data. As I highlighted on CNBC yesterday, Saudi’s actions speak louder than their words; they may be willing to entertain a production freeze if everyone else plays ball, but in the meantime, they are continuing to flood the market, involved in a political battle with Iran.

This is illustrated in the chart below. So far in February, we are seeing Saudi crude oil flows into China up 30% versus February last year, and some 67% higher than volumes seen last month, kicking around record levels. On the flip-side, while we are hearing repeated claims of production ramping up from Iranian sources, we are yet to see this manifesting itself in vastly higher Iranian export activity.

ClipperData Saudi crude oil to China

On the economic data front we have had a number of inflation readings out across the globe. Japan kicked things off, with inflation data coming in as flat as a pancake at 0.0% YoY in January, edging down from +0.2% in the month prior. German inflation was also as flat as a beaver’s tail, at 0.0% YoY for February, down from +0.5% in the prior month. We have also had consumer confidence and business climate assessments out of the Eurozone: both readings were downbeat.

Onto the US, and a second preliminary reading for GDP last quarter came in much better than expected, up 1.0% (annualized), versus consensus of 0.4%, and above the preliminary preliminary reading (you know what I mean) of +0.7%. The devil is in the details, however, as higher inventories boosted the latest print while consumer spending was weaker.

It has been an historic week for the US energy market, as hot on the heels of US oil exports is the first US LNG export cargo – leaving from the Sabine Pass terminal. Yet while this is viewed as a game-changer for the US – as it can now truly live up to its moniker as ‘the Saudi Arabia of natural gas‘ – exports could be just as big a game-changer for parts of Europe.

By reducing its reliance upon Russia, Europe will not only see benefits from a pricing perspective, but it will also help limit the political power that Russia holds over many countries. The chart below starkly illustrates Russia’s dominance in Europe, with a number of countries leaning on it for the majority of its gas needs.

In total, Russia supplies a third of Europe’s natural gas. Nonetheless, some estimates suggest that the US could catch up with Russia within a decade in terms of exports into Europe. Estimates also suggest that US exports could drop European LNG prices by 25% over the next two years. This benefit would be widespread across the continent; Germany relies on Russia for half of its gas needs, Italy for a third, while countries such as Bulgaria lean on Russia for the vast majority of its supplies.
eu natural gas

Finally, staying on the topic of Europe, while we discussed earlier in the week how US banks had a whopping $123 billion of exposure to the US oil and gas sector, Europe makes this pale in comparison to its $200 billion of exposure. This may not be the worst of it, however. While US banks have been exceedingly transparent in their reporting, European banks have been much more inconsistent; exposure could be significantly greater still.
EU oil and gas exposure

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