IEA report encourages oil rally

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Prices are drifting higher again today, encouraged on by a supportive report from the IEA. A monthly OPEC report awaits tomorrow, as does the weekly inventory report, but for now – hark, here are five things to consider in energy markets today:

1) The latest monthly IEA Oil Market Report has been released today, and has been gladly accepted by the bulls (with open arms and a warm hug), for the agency has revised up demand growth for this year – from 1.3 million barrels per day to 1.4 mn bpd, amid upward revisions to Chinese and Russian data

IEA highlights that if (and it is a hugely, huge ‘IF’) OPEC and NOPEC promptly and fully sticks to its production target, inventories should be drawn down by 600,000 bpd in Q1 and Q2 next year. Prior to these agreements, the IEA projected that it would take until the end of the year for inventory draws to begin.

Given the likelihood that producers will cheat, it seems more reasonable to assume that inventory draws will start later, rather than sooner.  

IEA shrinking inventories.jpg

2) Abu Dhabi National Oil Company (ADNOC) has said it will cut crude supplies by up to 5 percent across its three key export grades of Murban, Upper Zakum and Das crude as it looks to curb output in accordance with the OPEC production deal cut.

As our ClipperData illustrate below, the three grades account for the vast majority of export loadings. As ADNOC curbs output, it has said it will reduce Murban and Upper Zakum crude supplies by 5 percent and cut Das crude exports by 3 percent. UAE export loadings have averaged 2.8mn bpd so far this year.   

UAE exports Dec 2016.jpg

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3) The chart below highlights how short positions held by producers and merchants have been rising sharply of late. What is especially intriguing, however, is how much they increased earlier in the year – back when prices were tottering around in twenty- and thirty-dollardom: 

short positions oil merchants dec 2016.jpg

4) Another dose of decent information has come through from the IEA, with the graphic below from their medium term coal outlook. The agency says global coal demand will stall out over the next five years, with its share of the generation mix dropping to 36 percent, down from 41 percent in 2014.

Coal demand dropped last year for the first time this century, and is not expected to return to 2014 levels until early next decade. Chinese demand – which accounts for a half of global consumption – will play a key role in this outcome.

Asia’s share as a whole now accounts for 73 percent of global demand, up from 46 percent in 2000. Meanwhile, increasing natural gas consumption in North America has pressured coal’s share from 25 percent in 2000 down to 10 percent last year.     

global coal consumption 2015.jpg 

5) Finally, we’ve had a couple of interesting bits out of China relating to their refinery runs and energy production. According to data from the National Bureau of Statistics, refinery throughput rose to a record 11.14mn bpd in November, up 3.4 percent year-on-year. 

We’ve highlighted here a number of times this year how Chinese oil and gas companies are shifting their focus towards natural gas. This is exemplified in the latest data, with natural gas output up 5.5 percent year-on-year to 12.4 Bcm last month, while crude output continues to struggle, ticking slightly higher on October’s number, but still down 9 percent, year-on-year to 3.915mn bpd.