One hundred and thirty-eight years after the first US bicycle club was formed (the Boston Bicycle Club), and crude prices are freewheeling lower once more.
We have equity markets spiraling lower, as fears of global economic weakness combine with deteriorating credit conditions for energy companies. As the chart below illustrates, borrowing costs for US junk-rated energy companies have spiked to over 20%, as both confidence and lending in the sector dry up.
This downward spiral will lead to further credit downgrades and bankruptcies within the oil patch. All the while, access to credit is shrinking across all sectors due to a tightening in financial conditions. As equities sell off again today, banks are leading the freewheeling lower, as increased scrutiny about their debt holdings is causing a flight to safety. (And to add insult to injury, the flight to the safety of cash is met by talk of negative interest rates).
Not only is a credit crunch in the oil patch weighing on markets today, but so is the fear of brimming inventories – especially in the US. While yesterday’s surprise draw to crude inventories is a temporary respite in an upward trend, rising regional inventories for both oil and gasoline are causing logistical issues. As oil inventories at Cushing climb to a new record of 64.7 million barrels, operators in the area such as Enterprise Products Partners are experiencing logistical issues as storage runs out.
And as we have seen the growing oil glut over the last year translate into a product glut – sponsored by strong refining margins – we too now see a swollen product inventories. Hence, yesterday’s weekly inventory report showed PADD 2 (aka, the Midwest – same PADD as Cushing, OK) gasoline inventories rose to 62.85 million barrels, the highest level since February 1993 (think: Whitney Houston at #1 with ‘I will always love you‘).
Swelling inventories are starting to really weigh on refining margins; we saw the manifestation of this yesterday, in news that Valero was cutting back on refinery runs at its Memphis refinery due to it not being economically viable.
The bad news is unrelenting at the moment. While quarterly results from Pioneer Natural Resources were not too bad, reporting a smaller loss than expected, it still fell in line with other company announcements by significantly cutting capex. It also announced that it would pulling its rigs out of Eagle Ford; the only silver lining was that it said its new production in Q4 at 44 wells in the Permian basin was ‘exceeding expectations’.
This chart showing international gasoline prices illustrates how the US is experiencing the biggest benefit of the precipitous drop in oil prices. While Brent prices have dropped over 75% in since mid-2014, retail gasoline prices in Europe have only dropped by around 20%. This is because Europe has some of the highest fuel taxes in the world. In contrast, retail gasoline prices in the US have dropped by 44%.
While gasoline demand has actually been dropping in European countries such as the UK and Sweden, not only is US demand on the rise, but it has also experienced record auto sales in 2015, with a record 17.5 million vehicles sold. The irony? More than half of these sales were for higher gas-guzzling SUVs.