As renewed rumors and murmurs rise up of another OPEC production freeze meeting, it is having the desired effect that certain OPEC members would want: oil is rallying like a mad thing. After short positions on WTI reached a record in the latest CFTC data, the production freeze rumor-mill has spurred on a solid bout of short-covering it would seem. Hark, here are five things to consider in oil markets today:
1) Let’s take a look at South Korea, as it is the fifth largest oil importer in the world, but remains in the shadow cast by the larger importing countries – U.S., China, India and Japan. Imports are currently tracking at just shy of 3 million barrels per day this year, and as our ClipperData illustrate below, some 64 percent of these imports this year have come from one region, the Middle East, and from four countries: Saudi Arabia, Iraq, Kuwait and Qatar. Of these four, Saudi is the leading source. It accounts for just less than 30 percent of South Korea’s total oil imports.
2) We have been vocal for a number of months about our expectation of slowing Chinese crude imports; China’s voracious appetite for crude so far this year has appeared unsustainable. It is therefore encouraging to see imports slowing in official Chinese customs data; July’s data is lower for a third consecutive month. The General Administration of Customs data showed that Chinese crude imports slowed to their lowest level since January – something we’ve been pointing to furiously in our ClipperData.
Affirming this bearish news and compounding its impact has been additional data that fuel exports in July surged to a record of 1.25mn bpd, up over 50 percent compared to year-ago levels. There is not enough domestic demand to soak up all the products.
3) One suggestion for China’s elevated imports this year has been to offset slowing output. In the grand scheme of things, however, the drop in domestic Chinese production has made a modest dent, little more. As capex is slashed at China’s aging oil and gas fields, output has dropped by 4.6 percent in the first half of this year. Although significant in percentage terms, this drop is less than 250,000 bpd.
4) Short positions in WTI have risen to a record in the latest CFTC report – the highest since data began in 2006. The rally in recent days therefore seems to be driven by short-covering as much as anything.
The CFTC data also show that hedge fund positioning for gasoline is still net short, although an increase in long positions has narrowed this (h/t @JKempEnergy):
5) Last Friday we discussed how the world’s largest oil companies are raising more debt in order to defend their dividends; the net debt of the top five biggest oil companies has risen tenfold since 2008 to $138 billion. But not only are oil companies borrowing more, they are continuing to spend less.
As the chart below illustrates, capital expenditure for 10 large publicly-traded oil companies has been slashed by $100 billion – or 40 percent – in the last two years, as belt-tightening persists. Inevitably, such drastic cost-cutting is going to impact production volumes going forward. In fact, it is already; the same 10 companies cutting capex are also expected to produce 10 percent less oil this year compared to analyst estimates back in August 2014.