Two hundred and eighteen years after the first recorded parachute jump, and the crude complex has pulled the ripcord on its recent free-fall. After three consecutive down days, the crude complex is mustering a bounce after drifting back to the lower levels of where it spent much of last month. A plummeting euro is helping to pare some gains (see below), but for now, a bout of bargain-hunting is supporting prices thus far.
Meanwhile, natural gas is back testing three-and-a-half year lows ahead of today’s weekly storage report. An injection around +90 Bcf is expected, which falls inbetwixt last year’s +94 Bcf, and the 5-year average of +86 Bcf. With a few more weeks of injections to come, storage is set to reach a record….leaving prices well adrift of the monkey-bar of mid-two dollardom.
On the economic data front, we have had a couple of encouraging bits of European data; UK retail sales came in much better than expected across the board, tieing its highest year-on-year increase since mid-2008 with 6.5% growth.
Meanwhile, Spanish unemployment also dropped (but is still at a preposterously high 21.18%). The European Central Bank unsurprisingly kept interest rates unchanged at 0.05%, although ECB President Mario Draghi has done that thing he does in the post-announcement press conference, and talked down the euro by talking up the prospects of further stimulus (possible eta: December).
Across the pond we go, and Brazilian unemployment managed to hold at 7.6% despite expectations of a rise, while weekly jobless claims in the US came in better than expected at 259,000, but still a little higher than the previous two weeks.
Moving on to more energy-related news, and the below graphic highlights a couple of points; oil demand growth this century has basically all come from emerging markets (aka non-OECD countries) while developed nations have seen absolute demand tick lower. The second takeaway is that all three key bodies – EIA, IEA, OPEC – have all been revising their demand growth expectations higher as this year has progressed.
Views diverge, however, on where we go next. EIA expects oil demand growth to increase from 1.31 to 1.4 mn bpd in 2016, while IEA sees tempering demand growth from 1.8 mn bpd (hark, 5-yr high) to 1.2 mn bpd, while OPEC sees growth slowing from 1.5 mn bpd this year to 1.25 mn bpd in 2016.
Finally, the below image is from a Jim Chanos presentation about the link between debt and the oil market, where he makes a convincing case for why low interest rates and cheap financing sponsored the the US shale boom. Just as we learned from EIA last month that 83% of companies’ operating cash is devoted to debt repayments, he highlights how cash flows have not covered capital expenditures for a number of exploration and production companies since 2010; this trend is even apparent among ‘big oil’ companies.
Even though banks are continuing to lend to oil companies even as their balance sheets weaken, these terms are becoming increasingly tighter. As he sums up below, ‘the return to growth cannot happen without cheap equity and debt, neither of which exist today‘.