Preparing for an oil slump away from US pumps

The Oilholic is delighted to be back in lovely San Francisco, California, some 5350 miles west of London town. And what a 'crude' contrast it has been between two visits - when yours truly was last here little less than two years ago, the oil price was in three figures and our American cousins were (again!) bemoaning oil prices at the pump, not all that unaware about even higher prices we pay in Europe.

Not so anymore – for we’re back to under $3 per gallon (that’s 3.785 litres to Europeans). Back in January, CNBC even reported some pumps selling at rock bottom prices of as little as 46 cents per gallon in eastern US; though its doubtful you’ll find that price anywhere in California. 

Nonetheless, the Bay Area’s drivers are smiling a lot more and driving a lot more, though not necessarily honking a lot less in downtown San Francisco. By and large, you might say its happy days all around; that’s unless you run into an oil and gas industry contact. Most traders here are pretty prepared for first annual decline in global oil production since 2009, underpinned by lower US oil production this year.

Ratings agency Moody’s predicts a peak-to-trough decline in US production of at least 1.3 million barrels per day (bpd) that is about to unfold. On a related note, Genscape expects North American inventories to remain at historically high levels for 2016, and production to fall by -581,000 bpd in 2016, and -317,000 bpd in 2017, as surging blended Canadian production is expected to grow at +84,000 bpd year-over-year in 2016.

Most reckon the biggest US shale declines will occur in the Bakken followed by the Eagle Ford, with Permian showing some resilience. Genscape adds that heavy upgrader turnarounds in Spring 2016 will impact near-term US imports from Canada.

All things being even, and despite doubts about China’s take-up of black gold, most Bay Area contacts agree with the Oilholic that we are likely to end 2016 somewhere in the region of $50 per barrel or just under.

As for wider domino effects, job losses within the industry are matter of public record, as are final investment decision delays, capital and operating expenditure cuts that the Oilholic has been written about on more than one occasion in recent times. Here in the Bay Area, it seems technology firms conjuring up back office to E&P software solutions for the oil and gas business are also feeling the pinch.

Chris Wimmer, Vice President and Senior Credit Officer at Moody's, also reckons the effects of persistently low crude oil prices and slowing demand in the commodities sectors are rippling through industrial end markets, weakening growth expectations for the North American manufacturing sector.

Industry conditions are unfavourable for almost half of the 15 manufacturing segments that Moody's rates, with companies exposed to the energy and natural resource sectors at the greatest risk for weakening credit metrics.

As a result, Moody's has lowered its expectations for median industry earnings growth to a decline of 2%-4% in 2016, from its previous forecast for flat to 1% growth this year. "This prolonged period of low oil prices initially affected companies in the oil & gas and mining sectors, but is spreading to peripheral end markets," Wimmer said.

"Slackening demand and cancelled or deferred orders in the commodities sectors will constrain growth for a growing number of end markets as the fallout from commodities weakness and lackluster economic growth expands."

Everyone from Caterpillar to Dover Corp has already warned of lower profits owing to weak equipment sales to customers in the agriculture, mining, and oil and gas end markets. The likelihood of deteriorating performance will continue to increase until the supply and demand of crude oil balance and macroeconomic weakness subsides, Wimmer concluded.

Finally, as the Oilholic prepares to head home, not a single US analyst one has interacted with seems surprised by a Bloomberg report out today confirming the inevitable – that China will surpass the US as the top crude oil importer this year. As domestic shale production sees the US import less, China’s oil imports are seen rising from an average of 6.7 million bpd in 2015 to 7.5 million bpd this year.

And just before one takes your leave, Brent might well be sliding below $40 again but all the talk here of a $20 per barrel oil price seems to have subsided. Well it’s the end of circling the planet over an amazing 20 days! Next stop London Heathrow and back to the grind. That's all from San Francisco folks. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo I: Vintage Tram in Downtown San Francisco. Photo II: Gas prices in Fremont. Photo III: Golden Gate Bridge, San Francisco, California, USA © Gaurav Sharma, March 2016.

Lack of ‘crude’ conclusions from Chinese equities

As another week starts with both Brent and WTI futures trading lower, concerns about China which aren’t new, continue to be brandished about. What the Oilholic does not understand is the overt obsession in certain quarters with the direction of Chinese equities.

The country’s factory gate prices and purchasing managers’ indices haven’t exactly impressed over the last few months. Yet, somehow a stock market decline spooks most despite both the mechanism as well as the market itself lacking maturity. It is also constantly prone to government interference and crackdowns on trading firms.

On one level the anxiety is understandable; the Shanghai Composite Index – lurking just around 3,080-level at the time of writing this blog post – has lost nearly 39.5% since its peak in mid-June. However, it does not tell the full story of China’s economy and the correction it is currently undergoing, let alone its ambiguous connect with the country’s oil imports.

The sign of any mature stock market – for example London or Frankfurt – is that the total tradable value of equities listed is 100% (or above) of the country’s Gross Domestic Product. In Shanghai’s case, the figure is more in the region of 34%, suggesting it still has some way to go.

A mere 2.1% of Chinese equities are under foreign ownership at the moment. Many of the country’s major companies, including oil and gas firms, have dual listings in Hong Kong or New York, which while not an indication of lack of domestic faith, is more of an acknowledgement of impact making secondary listings away from home.

Mark Williams, Chief Asia Economist at Capital Economics, feels panic over China is overblown. “The debacle in China’s equity market tells us little directly about what is going on in China’s economy. The surge in prices that started a year ago was speculative, rather than driven by any improvement in fundamentals. A combination of poor data and policy inaction in China may have triggered recent market falls but the bigger picture is that we are witnessing the inevitable implosion of an equity market bubble,” he said.

Furthermore, current turmoil does not provide any direction whatsoever on what the needs of the economy would be in terms of oil imports. Apart from a blip in May, China has continued to import oil at the rate of 7 million barrels per day for much of this year. That’s not to say, all of it is for domestic consumption. 

Some of it also goes towards strategic storage, data on which is rarely published and a substantial chunk goes towards the country’s export focussed refineries. China remains a major regional exporter of refined products.

Admittedly, much of the commodities market should be worried if not panicking. Over the years, China consumed approximately half of the world’s iron ore, 48% of aluminium, 46% of zinc and 45% of copper. Such levels of consumption could never have been sustained forever and appear to be unravelling. 

Williams noted: “To some extent, China’s recent pattern of weakness in property construction and heavy industry set against strength in services is a positive sign that rebalancing towards a more sustainable growth model is underway. Policymakers in China, unlike their counterparts in many developed economies, still have room to loosen policy substantially further.”

While China’s declining demand is of concern, chronic oversupply in the case of a whole host of commodities – including oil – cannot be ignored either. The current commodities market downturn in general, and the oil price decline in particular, remains a story of oversupply not necessarily a lack of demand.

Another more important worry, as the Oilholic noted via a column on Forbes, is the possibility of a US interest rate hike. The Federal Reserve will raise interest rates; it might not be soon (i.e. this month) but a move is on the horizon. This will not only weigh on commodities priced in dollars, but has other implications for emerging markets with dollar denominated debt at state, individual and institutional levels; something they haven’t factored into their thinking for a while.

In summation, there is a lot to worry about for oil markets, rather than fret about where the Shanghai Composite is or isn’t going. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2015. Photo: Shanghai Stock Exchange, Shanghai, China © Gaurav Sharma, August 2014.

Oil storage, Chinese imports & Afren’s CEO

When the oil price is rocky, it seems storage in anticipation of better days is all the rage. Afterall, it does take two to play contango, as the Oilholic recently opined in a Forbes column. But leaving those wanting to play the markets by the side for a moment, wider industry attention is indeed turning to storage like never before.

We are told the US hub of Cushing, Oklahoma has never had it so good were we to rely on Genscape’s solid research on what’s afoot. In trying times, the industry turns to the most economical onshore storage option on the table. For some, actually make that many, Cushing is such a port of call.

As of February-end, Genscape says 63% of Cushing’s storage capacity has already been utilised. Capacity has never exceeded 80%, since Genscape began monitoring storage at Cushing in 2009. So were heading for interesting times indeed!

Meanwhile, the country now firmly established as the world’s top importer of crude oil – i.e. China – might well be forced to import less owing to shortage of storage capacity! Well established contacts in Shanghai have indicated to this blogger that in an era of low prices, Chinese policymakers were strategically stocking up on crude oil.

With Chinese economic data being less than impressive in recent months, it probably explains where a good portion of the 7.1 million barrels per day (bpd) imported by the country in January and February went. However, now that available storage is nearly full, anecdotal evidence suggests Chinese oil imports are going to drop off.

Import volumes for April are not likely to be nearly as strong. As for the rest of the year, the Oilholic expects Chinese imports to stay flat. Furthermore, Barclays analysts believe putting faith in China’s economic growth to support oil prices would be “premature” at best, with the country undergoing structural changes.

On a related note, lower oil prices will also slow the revenue growth of Chinese oilfield services (OFS) companies as their upstream counterparts continue to cut capex. Putting it bluntly, Chenyi Lu, Senior Analyst at Moody’s noted: "In addition to the impact on revenues, Chinese OFS companies will also see their margins weaken over the next two years as their exploration and production customers negotiate lower rates."

Finally, before yours truly takes your leave, it seems the beleaguered London-listed independent upstart Afren has finally named a new CEO following its boardroom debacle. Industry veteran Alan Linn will take-up his post as soon as the company’s “imminent” $300 million bailout is in place. We wish him all the luck, given his task at hand. That’s all for the moment folks! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.
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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2015. Photo: Oil pipeline, Fairfax, Virginia, USA © O. Louis Mazzatenta / National Geographic