Commodity Trade Mantra

Crude Oil Enters Bull Market Amid Output Freeze Talk

Crude Oil Enters Bull Market Amid Output Freeze Talk

Crude Oil Enters Bull Market Amid Output Freeze Talk

Another day, another dollar (rally in oil prices). The tag-team of dollar weakness and production freeze hopes combine again to rally crude oil prices higher for yet another day. Hark, here are five things to consider in crude oil markets today:

1) Qatar’s economy is looking none too shabby, despite the crude oil price drop of the last two years. It is doing better than the rest of the GCC (Gulf Cooperation Council), and this is being reflected through in its demand for products, which has doubled since 2011 – according to JODI.

Qatar is already preparing for the 2020 World Cup, and is into its second year of a $200 billion project to improve its infrastructure. This is boosting economic activity, while a new airport with a growing fleet of planes is boosting jet fuel demand. Qatar’s population is 2.5 million people, and its economy is set to grow by 3.4 percent this year, according to the IMF.

2) Domestic crude oil production in Qatar has risen in the last decade, up from around 1.5 million barrels per day in 2010 to over 2 million bpd currently, driven by rising condensate production. This rise in production has helped to offset the rise in demand, with imports edging lower of late.

After weak January, Qatar crude oil loadings this year have averaged just over 1 million bpd through the first seven months of this year, down 12 percent from year ago levels.

In terms of the destination of Qatar’s crude oil, our ClipperData show that Japan has jumped ahead of South Korea this year as the leading recipient, accounting for ~35 percent of total oil and condensate exports, with South Korea accounting for ~30 percent. India is in third place, but gaining ground:

3) Here is another chart to highlight how all paths lead back to energy. As the Eurozone continues to flirt with deflation, as it has done since late 2014, it could clamber back to 2 percent (YoY) should Brent crude oil prices stay at current pricing through the end of the year. (h/t @jsblokland).

4) A schizophrenic market summed up by two Bloomberg headlines and a chart:

Headline 8/7/16: Oil bear market attracts record bets on future price slide.

Headline 8/18/16: Oil on brink of bull market amid Saudi stabilization talk.

5) As the IHS index shows below, companies have slashed capital costs by 26 percent since prices started dropping in mid-2014. An increased focus on efficiency gains amid large discounts from service companies means the likes of BP have been able to dramatically lower the costs of some of its projects. BP’s Mad Dog project in the Gulf of Mexico was priced at $20 billion back in 2011; now costs are expected to be half that at $9 billion.

But while discounts from oil services companies appear unsustainable – with Schlumberger, Halliburton and Baker Hughes all reporting losses for Q1 – an emphasis by oil companies on frugality in their operations mean a certain amount of cost-cutting should be sustained in the coming years. Slashed expenditures in the oil industry are expected to add up to $1 trillion dollars over the 2015 – 2020 period.



Courtesy: Matt Smith

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