Credit Suisse: Oil Has Stabilized Because Saudis Got What They Wanted


Forget wealth effect. The global equity market can’t have a smooth bull run if oil prices are tanking.

This is because commodity-related capital expenditure accounts for around 30% of total capex globally, so even though consumers may benefit from cheaper oil, companies are hit first.Credit Suisse estimates that the fall in commodities capex has taken at least 0.8% off the U.S. economic growth in the first half this year and 1% off global growth over the last year.

But the worst is over, according to analyst Andrew Garthwaite and team. They listed three reasons: 1. demand for oil has stabilized; 2. non-OPEC production has peaked; 3. Saudi Arabia has achieved its goal of deterring new entrants.

Since Saudi Arabia is the wild card, Credit Suisse analysts took pains to explain their position:

We believe that the key variable is Saudi Arabia. If it were not for Saudi Arabia, then we fear that oil would have to behave like other commodities and if there is excess supply fall to levels where a third of production is below the cash cost and, given the likely fall in commodity currencies, this in turn would lead to a much lower oil price (maybe down to $30/barrel).

This leads to the question ‘Can Saudi Arabia support the oil market?’. We think the answer is yes. They control the vast majority of spare capacityaccording to our oil team and 13% of output.

Their clear aim was to restore market share against non-OPEC and avoid being a swing producer (and thus not repeat the 1980 to 1985 experience, when their oil production fell by 70% as they sought to defend the oil price) and also limit the growth in alternative energies. The key is clearly at what point they have achieved their objective. The issue is nearly always the same – costs fall much more quickly than expected, partly because commodity currencies fall and partly because of cost deflation.

Moody’s highlight that the breakeven for median shale is around $51pb. Thus it may be the case that around the current oil price, Saudi Arabia believe they have achieved their objective of pricing out new shale projects.

Additionally the reduction in the oil price has come at a cost, with the budget deficit estimated to be 20% of GDP in 2015 (IMF Article IV – Saudi Arabia). While government debt to GDP is very low at c1%, we view the recent selling of Sama reserves and the first sovereign bond issue since 2007 as signs that there is some degree of stress.

Brent crude jumped another 2.2% to trade at $49.58 recently after a 5% rally overnight.

Oil stocks rallied. CNOOC (883.Hong Kong/CEO) advanced 12.1%, China Oilfield Services(2883.Hong Kong) gained 9.5%, PetroChina (857.Hong Kong/PTR) was up 7.8%. Sinopec(386.Hong Kong/SHI) jumped 6.8%. The Hang Seng China Enterprises Index advanced 4%. Overnight, the United States Oil Fund (USO) rose 4.9%.

Oil jumps $2, breaking range as supply seen ebbing


NEW YORK (Reuters) – Oil prices jumped more than $2 a barrel on Tuesday, breaking out of a month-long trading range on a mix of technical buying and industry talk as well as U.S. government data suggesting the global supply glut could be ebbing.

Global benchmark Brent crude (LCOc1) rallied for a third straight day and settled above $50 a barrel for the first time in a month. This convinced some dealers that there was little chance prices would slide back to the 6-1/2-year lows touched in August.

Early gains were fueled by a U.S. government forecast for tighter oil supplies next year, and indications that Russia, Saudi Arabia and other big producers might pursue further talks to support the market. The rally accelerated above $50 on chart-based buying and a weakening dollar.

Brent settled up $2.67, or 5.4 percent, at $51.92 a barrel, breaking out of the $47 to $50 band it had traded since early September. Its session peak, a penny shy of $52, was the highest since Sept. 3, and took three-day gains to more than 7 percent.

West Texas Intermediate (WTI), the U.S. crude benchmark (CLc1), settled up $2.27, or 4.9 percent, at $48.53.

“We have reduced the probability of a return to the $37 to $38 area per nearby WTI,” said Jim Ritterbusch of oil consultancy Ritterbusch & Associates in Chicago. “We will maintain a longstanding view that price declines below this support level are virtually off of the table.”

Chris Jarvis, analyst at Caprock Risk Management in Frederick, Maryland, concurred, saying: “Steeper U.S. production declines over the near term have created a bid for oil prices.”

Even so, analysts told a Reuters survey that U.S. crude stockpiles likely rose last week for a second straight week as more refineries went into maintenance works. [EIA/S]

The American Petroleum Institute industry group will issue at 4:30 p.m. (2030 GMT) preliminary data on U.S. crude inventories for last week, before official numbers on Wednesday from the Energy Information Administration (EIA).

Global oil demand will grow by the most in six years in 2016 while non-OPEC supply stalls, the EIA said in its monthly report on Tuesday that suggested a surplus of crude is easing more quickly than expected.

Total world supply is expected to rise to 95.98 million barrels a day in 2016, 0.1 percent less than forecast last month, the EIA said in its Short-Term Energy Outlook. Demand is expected to rise 270,000 bpd to 95.2 million barrels, up 0.3 percent from September’s forecast.

Oil executives at an industry conference in London, meanwhile, warned of a “dramatic” decline in U.S. output that could lead to a price spike if fuel demand escalates. Mark Papa, former head of U.S. shale producer EOG Resources, told the “Oil and Money” conference that U.S. production growth would tail off this month and start to decline early next year.

Russia’s energy minister said Russia and Saudi Arabia discussed the oil market in a meeting last week and would continue to consult each other.

OPEC Secretary-General Abdullah al-Badri said at a conference in London that OPEC and non-OPEC members should work together to reduce the global supply glut.

Iran’s crude sales were on track to hit seven-month lows as its main Asian customers bought less.

Ratings cut on Chesapeake Energy, other oil and gas producers :Outlooks Cut to Negative by S&P in Oil Slump


Exxon Mobil Corp. and Chevron Corp. were among several U.S. oil and natural gas producers that had their outlooks or ratings cut by Standard & Poor’s as the industry suffers from weak crude prices, hurting their cash flow and liquidity.

S&P cut ratings for Chesapeake Energy Corp., Denbury Resources and Whiting Petroleum Corp., while giving Exxon and Chevron “negative” outlooks, the ratings agency said Friday in a statement. Exxon “has substantially more debt than during the last cyclical commodity price trough in 2009, while upstream production and costs are at similar levels,” S&P analysts Thomas Watters and Carin Dehne-Kiley said.

Oil prices have fallen 58 percent from last year’s peak, threatening $1.5 trillion in North America energy investments, according to Wood Mackenzie Ltd.  Oil has been stuck near $45 a barrel as U.S. crude stockpiles stay about 100 million barrels above the five-year seasonal average and OPEC pumps at near-record levels.

Exxon is one of only three U.S. industrial issuers to have a triple-A bond rating, along with Johnson & Johnson and Microsoft Corp. The oil company has held that grade from S&P since at least 1985, according to data compiled by Bloomberg.

The last U.S. company to lose the triple-A designation from S&P, as well as Moody’s Investors Service, was Automatic Data Processing Inc., which was stripped of the ratings after spinning off its auto-dealer services unit in April 2014.

Chevron has been rated AA by S&P since at least July 1987, Bloomberg data show.

“Most rating actions reflect lower credit-protection measures, negative cash flow, and uncertainty about liquidity over the next 12 months,” S&P said in the statement.

El Niño Could Turn Into Worst Nightmare For U.S Natural Gas Producers ( 10 % less demand this winter)

We have now tumbled into fall, although you wouldn’t know it by looking at the weather forecast. As NOAA’s 8-14 day outlook illustrates, we are set for above-normal conditions for the first week of October across, ooh, basically the entire US. This morning’s natural gas storage report is expected to yield an injection well above the 5-year average of 83 Bcf, and weather forecasts point to further solid injections in the weeks to come.

Last week we took a look at what an El Niño meant for the coming winter as WSI issued its winter weather outlook. WSI is predicting the strongest El Niño in 65 years, which ‘should drive warmer-than-normal temperatures across much of the northern U.S., as the polar jet stream weakens and lifts northward‘. Accordingly, WSI projects natural gas demand this winter to be 10% lower than the previous one.

With this in mind, and with storage levels already 16% higher than last year, and 4% higher than the five-year average, it provides some color as to why the January contract (aka the bleak mid-winter) is currently at a 16-year low.


(Click to enlarge)

There is a somewhat more frosty reception being felt across financial markets today, with Japanese equities opening for the first day this week, and promptly getting walloped. This baton of risk aversion is being passed from continent to continent, as Europe sells off and the US looks down.

Crude prices were finding some solace in a rising euro earlier in the day, with the European Central Bank downplaying the need for further stimulus. But as the outlook gets bleaker for broader markets, risk aversion is dragging crude lower. On the economic data front, we had a weaker-than-expected manufacturing print from Japan (which further greased the wheels for an equity sell-off).

Onto Europe, and German business confidence was the opposite of its compatriot indicator, the ZEW, by showing a weak current assessment but improving expectations (the ZEW was the other way round). Onto the US, and durable goods were relatively in line across the board, while weekly jobless claims came in a little better than expected at 267,000, but slightly higher than last week.

Fears are escalating in the oil patch about an impending credit crunch amid falling investment. Oil producers are set to see credit lines cut by an average of nearly 40%, as the majority of companies see their credit lines shrink due to the revaluation of assets (a twice-yearly phenomenon). This comes at a time when upstream investment is also shrinking in response to lower oil prices. The below chart from EIA highlights that investment levels in the coming years will be significantly lowerthan the 10-year annual average, due to the drop in prices (the crude oil first purchase price is adjusted for inflation).

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(Click to enlarge)

Finally, we discussed a couple of days ago how Singapore is seeing record stockpiles of fuel oil finding its way onto tankers amid exceptionally strong refining runs. We are seeing a similar tale emerge for diesel exports from China, as refiners keep on refining amid slower demand. According to the General Administration of Customs, diesel exports have risen 77% year-on-year to reach a record 175,000 barrels per day in August. Strong refining runs are endorsed by what we see in our#ClipperData, with Chinese oil imports year-to-date 14% higher than last year, rising to meet this ongoing demand.

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Shilling : “Oil is headed for $10 to $20 a barrel.”

If crude’s slump back to a six-year low looks bad, it’s even worse when you reflect that summer is supposed to be peak season for oil.

U.S. crude futures have lost 30 percent since the start of June, set for the biggest drop since the West Texas Intermediate crude contract started trading in 1983. That beats the summer plunges during the global financial crisis of 2008, the Asian economic slump in 1998 and the global supply glut of 1986.

It even surpasses the decline of 2011, when prices fell as much as 21 percent over the summer as the U.S. and other large oil-importing nations released 60 million barrels of oil from emergency stockpiles to make up for the disruption of Libyan exports during the uprising against Muammar Qaddafi.

WTI, the U.S. benchmark, fell to a six-year low of $41.35 a barrel Friday. It may slide further, according to Citigroup Inc.

“Summer is when refineries are all running hard, so actual demand for crude is as good as it gets,” Seth Kleinman, London-based head of energy strategy at Citigroup Inc., said by e-mail.

OPEC’s biggest members are pumping near record levels to defend their market share and U.S. production is withstanding the collapse in prices and drilling. The oil market is still clearly oversupplied and “it will get more so as refiners go into maintenance,” Kleinman said.

Oil demand usually climbs in the summer as U.S. vacation driving boosts purchases of gasoline and Middle Eastern nations turn up air-conditioning.

Crude has sunk this year even U.S. gasoline demand expanded, stimulated by a growing economy and low prices. Total gasoline supplied to the U.S. market rose to an eight-year high of 9.7 million barrels a day last month, according to U.S. Department of Energy data.

Crude could fall to $10 a barrel as the Organization of Petroleum Exporting Countries engages in a “price war” with rival producers, testing who will cut output first, Gary Shilling, president of A. Gary Shilling Co., said in an interview on Bloomberg Television on Friday.

“OPEC is basically saying we’re not going to cut production, we’re going to see who can stand lower prices longest,” Shilling said. “Oil is headed for $10 to $20 a barrel.”

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Iran Targets 45 Oil Projects To Boost Output : Bloomberg

Crude Reserves

Iran has selected 45 oil and gas projects to show international companies at a conference in London in December when new oil contract models will be discussed ahead of exploration auctions to double the country’s crude output.

The projects, including oil and gas exploration, will be discussed along with details of a new oil contract model at the Dec. 14-16 conference, Mehdi Hosseini, chairman of Iran’s oil contracts restructuring committee, said in an interview in Tehran. Iran hopes to boost crude production to 5.7 million barrels a day, he said.

The Persian Gulf nation’s output was 2.85 million barrels a day in July, according to estimates compiled by Bloomberg. Oil producers such as BP Plc and Royal Dutch Shell Plc have expressed interest in developing Iran’s reserves, the world’s fourth-biggest, when sanctions are removed following last month’s nuclear agreement with world powers.

“We will define projects in the oil and gas sector as much as feasible and necessary since we believe this sector will bring wealth and economic development,” Hosseini said. “As far as this conference is concerned, we have defined around 45 projects which include exploratory blocs at varying development costs.”

Iran may give companies two to three months to decide whether to bid on the projects, he said. “The exact length will be decided by the time of the conference.” Shortly after that, Iran will call for bids, he said.

“We consulted with almost all medium and major oil companies over our contractual contents and projects. And the feedbacks have been positive,” he said.

New Contract

Iran will adopt “risk service contract” models which will offer investors payback in the form of cash or oil allocation, he said. They won’t be allowed to claim ownership of the country’s energy reserves, he said.

“They would resemble production sharing but with different characteristics,” he said. “The international oil company, or the investing company, would be accepting certain risks in view of which it would be entitled to a portion of the oil thus produced. Or the reward of that risk is a share/portion of the oil.”

Iran’s production costs are $8 to $10 a barrel so, “our projects will be attractive to investors,” Hosseini said. Falling oil prices are in Iran’s interest at this point because high prices encouraged uneconomical fields, he said.

“The drop in prices from $100 a barrel to around $50 a barrel now is only in the short run,” Hosseini said. “Looking at the international oil industry over the long-run, the demand will rise and so will the prices.”

Production Boost

Pending the end of sanctions, Iran wants to boost oil production to about 15 percent of the Organization of Petroleum Exporting Countries’ output, or more than 4 million barrels a day, he said. “As OPEC’s share increases so does our share and we will need to build capacity. As a preliminary goal in the short run we plan to produce 5 million barrels a day and then go from that to 5.7 million barrels a day.”

Iran’s oil reserves are estimated at 157.8 billion barrels by BP Plc. That’s enough to supply China for more than 40 years. Iran can boost oil production by 500,000 barrels a day within one week after international sanctions are lifted, Oil Minister Bijan Namdar Zanganeh said in an interview with state TV earlier this month. Sanctions against Iran’s oil industry should be lifted by late November, he said.

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Natural Gas Drillers Can’t Catch a Break : Bloomberg News

Natural gas drillers who flocked to liquids-rich basins in search of better profits just can’t seem to catch a break.

Seven years ago, as shale output surged and gas futures tumbled more than 60 percent, producers abandoned reservoirs that only yielded gas and moved rigs to wells that also contained ethane, propane and other so-called natural gas liquids, or NGLs. These NGL prices were tied to oil futures, which climbed in 2009 as the economy recovered. It was a strategy that worked well — for a while.

Drillers fled natural gas for oil and liquids as commodities collapsed.
Drillers fled natural gas for oil and liquids as commodities collapsed.

Those days are over. Oil has plunged 56 percent from a year ago, and propane at the Mont Belvieu hub in Texas has tumbled 64 percent. The spread between NGL prices and natural gas shrank 9.2 percent last week to $7.02 a barrel, the lowest in at least two years, squeezing producers’ profits.

The spread between natural gas liquids and natural gas prices has narrowed, squeezing producers' profits.
The spread between natural gas liquids and natural gas prices has narrowed, squeezing producers’ profits.

The culprit is a repeat offender: shale production. This time, the boom in oil output from reservoirs like the Bakken in North Dakota has created a glut of NGLs, and the market is poised to remain well supplied. To survive, gas producers will have to focus on the lowest-cost wells.

Production of natural gas liquids has surged, creating a glut as drillers flee dry gas.
Production of natural gas liquids has surged, creating a glut as drillers flee dry gas.

“Drillers are going to have to retreat to where the sweet spots are,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “At these price levels, the rig count isn’t going to move higher.”


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