Oil marching on as sentiment improves

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Once again, broader markets are maintaining a risk-on stance, with a falling dollar helping to usher crude prices higher. With weekly inventories bringing focus back to U.S. fundamentals as we charge toward a holiday weekend (stay strong, my friends), here are five things to consider relating to oil and energy today. 

1) A. Gary Shilling has again reiterated his call for $10 oil, predicated on an expectation for excess production, dollar strength, and a potential global slowdown. He also lays blame with Saudi and its neighbors as they ‘continue to play a desperate game of chicken with other major oil producers’.

This game of chicken is no more starkly illustrated than in the combined oil exports of Saudi Arabia, Iran and Iraq. While crude loadings for the three were actually down in 2014, we saw them rise through 2015 to average 725,000 bpd higher than the previous year.

2016 is the year, however, where we are really seeing the triumvirate turning the screws, especially with the return of Iranian barrels after the lifting of sanctions. Exports for the three nations are averaging more than 2.3 million barrels per day higher through May year-to-date compared to the same period last year. I repeat, 2.3mn bpd:

saudi iran iraq oil exports ClipperData

On this basis, we’re likely to see production from total OPEC members rising above 33mn bpd in the coming months, as Saudi increases output to meet summer power generation demand.  

OPEC productionhot hot heat2) As weather outlooks flip to fiery red, natural gas prices are closing in on three-dollardom for the first time in a year. As temperatures are set to be above normal across the entire U.S. in the coming weeks, cooling demand is set to kick higher, while we’re seeing various supply disruptions popping up – from an explosion at a gas plant in Mississippi closing platforms in the U.S. Gulf, to flooding in West Virginia.

3) Saudi Arabia’s foreign exchange reserves last month have risen for the first time in 16 months – albeit by the smallest of margins. Net foreign assets sit at $577 billion, down $99 billion from year-ago levels, but up 0.1% on the prior month. The stemming of the tide has been less to do with rising oil prices and belt-tightening, and more to do with the securing of a $10 billion loan last month.

4) Stripper wells, which are classified as oil wells which are producing 15 barrels per day or less over a one-year period, accounted for 10% of U.S. production last year. While this seems a sizable chunk, their share was much higher in 2008, at 19%, when total production was considerably lower.

Stripper wells, named because they strip the remaining oil from a well, see low, but fairly consistent, production levels. There are 380,000 stripper wells in the U.S., compared to 90,000 nonstripper wells.

stripper wells to 2015

5) Finally, the chart below shows how Brexit has impacted the price of U.K. natural gas (aka NBP). As the pound has been dealt a solid dose of the WBWs (whoop-bam-wallops), it has swiftly devalued by as much as 13% versus the U.S. dollar. This has meant NBP has become much cheaper in foreign-denominated currencies.

As @kwok_w_kwan points out in this post today, U.K. natural gas prices help dictate global LNG prices, because the U.K. is the home of last resort for LNG cargoes. Before India and Japanese importers buy spot LNG cargoes, they look to NBP to set the floor for prices.

The result of the weaker pound is that the U.K. will have to pay more to import LNG, and that U.S. LNG export facilities will likely be hurt, with it less cost effective to ship LNG to the U.K.

NBP in dollars