by Ambrose Evans-Pritchard
July 29, 2016
Oil rigs in the Permian Basin of Texas are still being built even at $45 oil, defying shale skeptics
Oil prices have tumbled to a three-month low as surging supply once again exposes the chronic global glut and threatens to perpetuate the energy slump for another year.
US crude contracts crashed through key technical barriers to $42.40 yesterday (7/26) before recovering slightly in late trading on profit-taking. They have fallen by 9% over the last four sessions.
Speculators have given it an extra push. Data from the Commodity Futures Trading Commission in the US shows that 52 hedge funds have taken out large short positions, betting that the summer sell-off still has a further leg to run.
Prices are unlikely to re-test the February lows of $26 when asset prices were tumbling across the world and markets were in a full-blown ‘China panic,’ pricing in a global recession that never happened.
The latest oil tremors reveal little about the underlying health of the global economy, which has so far shrugged off Brexit fears and may be accelerating as central banks and governments in Asia, Europe, and North America step up precautionary stimulus.
Oil has fallen 9% in the last four trading sessions on
China’s growth rose to 6.7% in the second quarter, fueled by surging credit. Proxy indicators tracked by Capital Economics show a marked pick-up in June, with enough fiscal spending in the pipeline to keep China’s mini-boom running through the year.
Other commodities have rallied over the last month and may be a better reflection of the global economy. The base metals complex, steel, and grains are mostly moving in lockstep with global stock markets, catalyzed by the surge in the world money supply that lies behind it.
The broadest ‘M4 Divisia’ gauge of money in the US is growing at the fastest pace in four years, a rise that would normally signal stronger economic growth ahead and reflationary pressure.
The growth rate of M4 Divisia jumped to 5.9% in June from 2.8% a year ago, according to the Center for Financial Stability. The US money data sets the tone for the rest of the whole dollar-linked global system, and especially for emerging markets.
Simon Ward from Henderson Global Investors says his gauge of the world’s money supply – real six-month M1 money – is growing at an annual rate of 10.5%, the fastest since the blitz of stimulus after the Lehman crisis.
“We think global growth will be strong until the spring of next year,” he says. The data is hard to square with a prolonged commodity slump.
The global money supply is surging, signaling a burst of
The International Energy Agency (IEA) estimates that global demand for crude rose a respectable 1.2m barrels a day (b/d) in the second quarter to 96m, driven by the fastest rise in oil consumption by the rich OECD countries since 2010. The IEA expects the momentum “will be roughly matched through the year as a whole.”
The current sell-off is driven almost entirely by output coming back on stream after a string of disruptions, revealing just how far the market had got ahead of itself in May and June.
Supply disruptions drove the Spring rally but these are abating,
exposing the glut below.
Roughly 1.2m b/d of Canadian oil is poised to flow again as forest fires in Alberta are finally contained. Nigeria boosted production by 300,000 b/d to 1.9m in late June as the government edged towards a tentative truce with rebels in the Delta region.
Adam Longson from Morgan Stanley says the rebalancing would take a lot longer than previously assumed. “The markets are oversupplied well into 2017,” he says. Inventories in OECD states are a record 3,075m barrels and are still rising, albeit at a much slower pace than before.
JP Morgan says the creation of a national unity government in Libya could add an extra 400,000 b/d to global supply if the deal holds, some of it relatively quickly.
At the same time, the US shale industry has proved far more resilient than expected as it masters new drilling tricks and slashes costs. A recent report by consultants Wood Mackenzie estimated that prime shale fields at Eagle Ford and Wolfcamp in Texas can now make a profit below $40 a barrel.
The closely-watched rig count in the US has been rising for the last month, catching traders badly off guard. Frackers added 14 fresh rigs to 371 in the week to July 22 – mostly in the Permian basin in Texas. “We have reached the bottom of the cycle,” says Schlumberger’s chief executive Paal Kibsgaard.
This is happening as OPEC continues to nudge up output to a record 33.2m b/d in a fight for market share, with Iran already up by almost 1m b/d since February to pre-sanctions levels of 3.6m b/d.
Richard Mallinson from Energy Aspects says excess stock built up by refineries is the trigger for the latest slide in crude but this disguises an underlying shift in the market balance that could ultimately lead to a future supply crunch. He cites two data points as examples:
Output has slumped by 400,000 b/d in China over the last year, yet the country is stepping up purchases for its strategic petroleum reserve by roughly the same amount. The scissor effect of these opposing trends may be enough to flip the market from surplus to deficit before long. In addition, Mexico has lost a further 250,000 b/d as old fields are depleted.
“Global demand is quite healthy. We think the market will become increasingly tight, with prices in the $70s in 2017,” he says. So much for the prospects of “renewable energy” like solar et al to replace oil to drive the world economy.