One hundred and sixteen years after the birth of Woody Woodpecker creator and animator Walter Lantz, and WTI crude oil is knocking on the door of $45 – and knocking on wood that US production is wilting. Here are six things to consider about the oil market on this final Wednesday in April:
1) Today is set to be dominated by a game of two halves; inventories this morning, and Federal Reserve rumblings this afternoon. While the inventory report points to a draw to crude stocks (h/t lower imports), expectations of dovish rhetoric from the Fed is putting downward pressure on the dollar. Hence, crude is once again pushing on to new highs for the year.
2) A piece today talking about how Saudi is making ground on an Asian ‘oil market turf war‘ by selling a spot cargo to a Chinese teapot refiner sent me scurrying off into our ClipperData to see if this an emerging trend. It definitely is.
Saudi Arabian crude oil exports are up over 3.5% in Q1 compared to last year’s average. Last year, some 61% of Saudi Arabia’s crude oil exports went into Asia; so far this year, that percentage is up to 65%. China, on average, accounts for 14% of Saudi Arabian crude exports – although this percentage spiked in February to 18% when Saudi import volumes reached a record (as Iranian sanctions were lifted, interesting timing…).
What is also fascinating about Saudi Arabian exports is that the US remains the leading recipient – with imports last month reaching an eleven-month high at 1.28 million barrels per day. In fact, US import volumes from Saudi Arabia are up 9% in the first quarter compared to last year’s average.
3) The graphic below highlights how badly the drop in oil prices is hurting certain states, as rising unemployment in states such as Texas, Louisiana and Oklahoma is causing an increase in loan delinquencies.
Widespread job losses in the oil patch are estimated at 119,600 since September 2014, or 22% of the total, causing delinquency rates in oil-rich states to rise above the national average.
According to the governor’s office, oil, gas and mining industries account for ~70% of Wyoming’s revenue, and oil and gas jobs in the state are down 25% from a year ago.
4) In terms of economic data, things are a little bit light; we’ve had UK Q1 GDP, which was revised slightly lower to +0.4% compared to the prior reading, at +2.1% on a year-on-year basis. Eurozone money supply, a leading indicator of inflation, has continued to hold at 5%, where it has hovered around for the last 12 months (aka benign inflation). A lack of stronger consumer spending was also a theme in Eurozone private sector loans, which grew at a lesser pace than expected. US pending home sales were above consensus at +1.4% MoM in March.
5) Total is the latest oil major to report quarterly earnings. It too followed the same script as BP’s results yesterday, in that its quarterly profit beat estimates, while being considerably lower than last year. Net profit fell to $1.61 billion, down from $2.66 billion a year earlier.
It too has a surgical focus on cost-cutting; it squeezed the technical cost of extracting oil in 2015 down to $23 a barrel, the lowest among the majors, while planning to cut capex to below $19 billion – down from $23 billion last year.
6) Last week we discussed how high yield energy bonds are seeing their yields normalizing as the fear of default recedes amid cost-cutting, rising oil prices, and the quiet passing of another debt redetermination period. This confidence is no better exemplified than in the appetite for new share issued by the oil and gas sector.
Last year we saw US oil and gas companies raise $18 billion from investors. We are not a third of the way through this year, and companies have already raised over $10 billion. As the chart below illustrates, investors are encouraged to jump into these new tranches; after all, their performance over the last four quarters has been impressive.