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In
this week’s newsletter, we will take a quick look at some of the
critical figures and data in the energy markets this week. Last year
ended on a sour note, with oil prices hitting 11-year lows. Aside from a
fleeting price rally, 2016 doesn’t look much better, at least for the
first half of the year.
We will then look at some of the key market movers early this week
before providing you with the latest analysis of the top news events
taking place in the global energy complex over the past few days. We
hope you enjoy.
Chart of the Week
• 2015 was a historically bad year for oil. The energy portion of the S&P Goldman Sachs Commodity Index (GSCI) fell 41 percent over the course of 2015.
• But last year was also an annus horribilis for other commodities.
Every one of the 16 commodities tracked in the GSCI saw major losses.
Nickel had the worst year, with a more than 40 percent decline in value.
Grains fared a little better, based on tighter market conditions in the
first half of 2015.
• Readers by now have likely become familiar with the causes of the
commodity crash: boom-bust cycles, a strengthening dollar, slowing
global economic demand, debt, and deflationary pressure in many parts of
the world. The big question is when any of these trends start to
reverse. For the next few months at least, the bearish sentiment will
persist.
Market Movers
• Swift Energy Company, an independent oil and gas producer focusing on the Eagle Ford, became the 40th company
to declare bankruptcy since the beginning of the oil price downturn.
The company had already slashed spending by 60 percent and laid off a
fifth of its workforce, but persistently low prices overwhelmed the
company. It filed for Chapter 11 protection on December 31.
• Canadian Oil Sands (TSE: COS) continues to resist the takeover bid from Suncor Energy (NYSE: SU),
and there are only a few days left before the C$4.3 billion bid
expires. Canadian Oil Sands, with its stake in the Syncrude project,
wants to remain independent. Suncor is hoping to increase its holdings
of the Syncrude asset. On Monday,
executives at Canadian Oil Sands told its shareholders that it should
remain independent, while Suncor argued the shareholders should accept
the hostile takeover. January 8 is the deadline.
• Chesapeake Energy (NYSE: CHK), the second largest
natural gas producer in the U.S., was downgraded by Raymond James due to
low natural gas prices. The company has lost more than 75 percent of
its value over the past year, although its share price jumped 10 percent
on Monday
after natural gas prices staged a small rally. There is a growing
consensus among ratings analysts that Chesapeake could struggle to meet
payments on billions of dollars in its outstanding debt.
Tuesday January 5, 2016
Happy New Year! 2016 kicked off with a ban in the energy markets. Oil
prices rallied more than 4 percent in the opening hours of trading, as
the markets weighed the consequences of a sudden outbreak in tensions
between Saudi Arabia and Iran.
The events are complex and fluid, but the short version goes like this:
Saudi Arabia executed 47 prisoners over the weekend, one of which was a
notable Shiite cleric. Iran (and many other countries around the world)
expressed outraged. Iranian protestors torched the Saudi embassy in
Tehran, causing Saudi Arabia to cut off diplomatic relations with Iran.
Middle East tensions often cause a spike in oil prices, so a sudden
conflict between OPEC’s first and third largest oil producer
unsurprisingly affected crude on January 4. At the same time, markets
tend to react first, only to come to more realistic conclusions later.
For now, the conflict has no real tangible effect on oil markets – there
is little chance of a supply disruption, absent a more catastrophic
escalation in the conflict. As such, oil prices quickly retraced their
gains on January 4, closing out the day mostly back where they started.
The conflict between Saudi Arabia and Iran almost certainly won’t erupt
into a direct military confrontation. Instead, the conflict could play
out in the world of oil. As a result, the effect on oil prices is, if
anything, negative not positive. For example, Saudi Arabia just slashed
its price for oil shipments heading to Europe, the region where Iran
held significant market share before 2012 sanctions forced it out. Saudi
Arabia is likely trying to box out Iran as it ramps up oil exports in
the coming weeks and months when sanctions are removed. Saudi Aramco
announced on January 5 that it would discount oil exports to Northwest
Europe by $0.60 per barrel and by $0.20 for oil destined for the
Mediterranean. The market share strategy also serves to outcompete
Russia for the European market. Competition for market share will push
down prices as more discounted crude floods the market.
Moreover, as the markets shove aside worries over geopolitical tension,
the bearish case for oil once again stands out. It even got some more
supporting evidence as we started the New Year. Manufacturing data from
China painted a worrisome picture for the world’s second largest
economy, which continues to slow. China’s major stock indices crashed by
7 percent.
The instability in China adds to the growing body of evidence that the
global economy is not faring well. Yet another way of looking at the
problem is through trade activity. In 2015, container traffic at some of
the busiest ports in the world grew at its slowest rate
in a half decade. In fact, container traffic at the 30 largest ports
actually shrank by 0.9 percent in the third quarter, a time of year that
normally sees an uptick in activity. That was the first decline since
2009. Part of the problem is the strengthening U.S. dollar, depressing
demand for Chinese goods because of the yuan link to the dollar. But
tepid economic growth is raising concerns about the stability of the
global economy.
Meanwhile, another geopolitical crisis to keep an eye on is in Libya. Militants associated with the Islamic State attacked
Libyan security forces at the country’s largest oil export terminal, Es
Sider. Together with the Ras Lanuf port nearby, the two terminals have
the capacity to export 560,000 barrels per day, but both are closed at
the moment.
The attacks resulted in the explosion of an oil storage tank after it
was hit by a shell. The port has been closed since 2014, so the attacks
won’t necessarily affect export levels. But the events are illustrative
of the terrible violence plaguing the war torn country, fomenting
instability that will prevent a return to pre-war export levels. The
attacks come even as the political situation is starting to improve. The
two rival governments, controlling east and west portions of the
country, respectively, have signed onto a power-sharing agreement. It
remains to be seen how that can help Libya return to some semblance of
stability.
Raymond James expects
that oilfield service companies will experience a rough year in 2016,
as rig counts continue to fall and drilling activity remains subdued. At
the same time, analysts say that the second half of the year could
rebound. “Look for a roller coaster ride in early 2016 for oil field
services, followed by outsize gains in the second half,” Raymond James
recently concluded. They project the rig count to fall by another 150
over the next six months, which will result in “a much uglier
fundamental year than current consensus estimates.” But drilling
activity could come back quickly if prices rebound, and all of the job
losses and sidelining of equipment could create a supply constraint for
rig services. “Labor and service availability likely becomes a major
constraint on the ability to meet activity demand,” Raymond James
analysts wrote. “This should be compounded by oil field service pricing
increases as the market for services gets tighter.” In short, things
will get worse for oilfield service companies, but once the market
turns, fortunes could come back relatively swiftly.
In Oklahoma, the number of earthquakes surged
by 50 percent in 2015 compared to a year earlier, hitting a total of
881 with a magnitude of 3 or greater. That set another record for
seismic activity in the state, and many scientists and state regulators
are increasingly confident that wastewater disposal from hydraulic
fracturing is a main contributor. Regulators have issued voluntary
guidelines for drillers to reduce disposal injections, but after one
company rebuffed the requests, the state is looking at mandatory
directives. Action could also come from the state legislature. New
regulations could affect drilling operations for companies in the
state.
We invite you to read several of the most recent articles we have published which may be of interest to you:
Saudi-Iran Dispute Won’t Cause Lasting Oil Price Rally
4 Big Energy Stocks To Watch In 2016
BP’s CEO Finally Sees Oil Prices Bottoming Out
What Comes After The Commodities Bust?
Fueling Star Wars’ Robots, What Powers The Droids?
Oil Companies Shun South China Sea As Geopolitical Tensions Rise
Is 2016 The Year Of Wind And Solar?
TAPI Pipeline Inches Forward
$10 Trillion Investment Needed To Avoid Massive Oil Price Spike Says OPEC
That’s all from your midweek intelligence report, we hope you enjoyed it and we´ll be back on Friday, with your latest energy market update, industry intelligence and special report.
Best regards,
Evan Kelly
News Editor, Oilprice.com
P.S. – Oilfield service companies might have been the first subsector in
the industry that felt the pain of lower oil prices, deepwater drillers
might be the subsector that will suffer the longest from the oil bust.
Veteran trader Dan Dicker explains why some deepsea drillers are off
limits now and warns that some of them might collapse before a potential
rebound kicks in. Find out which players Dan Dicker is talking about by clicking here.
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