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#Post#: 299--------------------------------------------------
Oil Update
By: Marc Chandler Date: January 15, 2015, 10:36 am
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The price of oil has steadied in recent days after making new
lows on Tuesday. The March WTI futures contract approached its
20-day moving average earlier today (~$52.30) for the first time
since late November. This was seen as a new selling opportunity
as it has reversed lower. We continue to look for lower
prices and would not be surprised to see the price of WTI fall
to the late-2008/early-2009 lows in the $32-33 area.
The EIA continues to project higher production, even as the
price has fall. The World Bank cut is world growth forecasts
for this year and next earlier this week.
US oil production rose by about 60k barrels a day last week to
9.19 mln barrels a day. This is the highest in at least 32
years. EIA estimates US oil output will average 9.31 mln
barrels a day, up from 8.67 mln a day average last year. Output
next year is expected to average 9.53 mln barrels a day.
This forecast seems to be at some risk of being revised lower.
However, there is an important lag here. Some new wells are
only now being exploited. Shale production, which accounts for
about a third of US output typically have short lives than
conventional production. Capital budgets are being cut, and
this will impact futures exploration and development.
The other point that we made before and worth repeating in this
context is that US oil production is not just a function of OPEC
trying to maintain too high a price in the past, which gave rise
to competition and alternatives, but also access to cheap
credit. Capital is not as cheap as it was. However, the debt
acts like a fixed cost. Businesses with high fixed costs are
incentivized to produce at a loss if necessary. We expect
debtors in this space to be squeezed and the fragmented industry
to rationalize through failures and mergers. Regionally, Texas
and North Dakota are particularly vulnerable.
The increase in production has come despite the decline in the
number of oil rigs. The number of operating oil rigs in the
fell by 61 last week to 1421, which is the lowest in a year.
The oil rig count peaked early last October at 1609. In past
dramatic bear markets for oil, the US has lost between a third
and half of its rigs. A comparable decline now should not be
surprising. It may take a couple of quarters. Due to
technological advances that boost efficiency, like horizontal
drilling, the correlation between rig count and production has
been loosened.
Output is still exceeding demand. This translates into higher
inventories. Crude inventories rose by 5.39 mln barrels, which
in the US is about a little more than half a day of production.
According to EIA figures, US crude inventories stand at 387.8
mln barrels.
US refineries continue to operate at more than 90% capacity.
Gasoline inventories rose 3.17 mln barrels to 240.3 mln.
Distillates (e.g. heating oil) inventories rose 2.93 mln barrels
to 139.9 mln. The average price of retail gasoline has fallen
to $2.10, the lowest in nearly six years. The decline in
gasoline prices is expected to boost household discretionary
consumption. US December retail sales, especially the core
rate, which excludes gasoline, autos, and building materials,
was disappointing, but generally US household consumption
fairly strong. Moreover, US consumption is taking place without
the use of revolving debt. We caution against reading too much
into the disappointment with any one high frequency data point,
if a trend were to develop, that would be a different story.
There are dozens of oil benchmarks. Brent and WTI are simply
the most important. The West Canada Select benchmark fell to
about $33.30 recently. The combination of new pipelines (not
the Keystone yet...) and new rail capacity has boosted Canada's
shipments to the US. In early January, Canada was shipping 3.2
mln barrels a day to the US. This is displacing others,
including Saudi Arabian oil, and is challenging Mexico. The
premium for Canada Select over Mexico's Maya has fallen to four
year lows. In early January, the US imported about 533k barrels
a day of Mexican oil.
Another important development has been the the convergence
between WTI and Brent. There are several factors at work. Some
participants expect the US output to slow faster than the rest
of the world's production. OPEC wants to Brent to fall below
WTI. Over time, this will encourage US refineries to process
Brent over domestic output, squeezing US producers more. At
the same time, there appears to be growing speculation that the
US will lift, or at least modify its ban on crude exports. This
is also seen to be relatively supportive for WTI over Brent.
Participants are also watching storage capacity. Europe has
less unused storage capacity than the US. Extra storage
capacity may help underpin prices in the face of insufficient
demand (relative to supply). Storing oil on ships is expensive.
Estimates put it around $1.20 a month per barrel. Storage at
Cushing, which is where WTI futures are delivered, costs about a
third as much.
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