The Numbers Report, part of the weekly premium publication, Oil & Energy Insider, compiled a series of data points that make for a worrying outlook for the oil markets. Here are some of them:
Short positions on the rise
- For the week ending on October 11, the number of short positions on WTI rose to more than 540,000 contracts, the highest since 2007.
- Producers take short positions to sell future production, locking in prices at some point in the future in order to mitigate risk. As the EIA notes, banks can require producers take such positions as a prerequisite for securing a loan.
- Aside from mere speculation, a rising number of short positions can be an indicator that producers are confident that they can make money at the current futures prices.
- But they also are a bearish signal for oil prices, lending weight to the notion that prices will not rally very much in the near-term.
Renewables overtake fossil fuels
- For the first time ever, renewable energy added more electricity capacity across the globe than fossil fuels did. The IEA estimates that in 2015, 153 gigawatts of renewable capacity was installed, about 55 percent of the global total.
- About 500,000 solar panels were installed every single day in 2015, on average.
- The IEA expects renewables to make up 42 percent of the market by 2021.
- Much of the growth will take place in four countries: the U.S., China, India and Mexico. The EU has a lot of renewable energy, but its growth rate is a bit lower than the others.
- “We are witnessing a transformation of global power markets led by renewables and, as is the case with other fields, the center of gravity for renewable growth is moving to emerging markets,” IEA Executive Director Fatih Birol said.
Refining margins declining
- The massive stockpile of refined products sitting in storage around the world continues to weigh on refining margins.
- Margins were down 42 percent in the third quarter compared to a year earlier, averaging just $11.60 per barrel. Aside from the first quarter of this year, refining margins in the third quarter were near their lowest levels in years.
- That is a stark difference from 2015, which was an excellent year for refiners. The falling price for crude combined with strong demand saw margins spike to $20 per barrel. But as refiners ramped up output to take advantage of that opportunity, they churned out record product. And as demand softened, inventories built up.
- Low refining margins will take away one of the few sources of strong earnings for the oil majors, which are set to report third quarter numbers in the next few days and weeks.
Oilfield services turning a corner
- The top oilfield service companies have managed to put a halt to the enormous job cuts that were forced upon them by the worst oil bust in decades. The four largest OFS companies cut 140,000 jobs over the past two years, according to the FT.
- But in the third quarter of 2016, employment figures remained about the same at Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL), the two largest firms, and only down by about 2,000 at Baker Hughes (NYSE: BHI), the third largest.
- The rig count is back up and oil prices have seemed to stabilize at $50 per barrel, with more work promised for OFS companies as drilling picks up.
- Schlumberger’s CEO Paal Kibsgaard struck a strong and optimistic tone in a conference call with investors, claiming that “we have indeed reached the bottom of the cycle” and are planning for the “recovery phase.”
- He also stated that Schlumberger would only look at profitable projects, a warning to oil producers who have demanded lower rates for services. Kibsgaard’s comments suggest that oil companies will no longer be able to squeeze savings out of service companies.
OPEC deal is underwhelming
- Even if OPEC somehow agrees to cut its collective output to the lower end of its proposed range at 32.5 million barrels per day, the deal would only cut into existing excess supplies by 11 percent, Bloomberg says.
- The cuts will bring global inventories down in 2017 by just 36.5 million barrels over the course of the entire year, which is hardly a game changer.
- Even that level of cuts could be too much to ask for OPEC – it would require reductions of 900,000 barrels per day below September levels.
- The problem becomes even more difficult as Nigeria and Libya are ramping up disrupted output. Iran too is targeting higher production levels. All three nations are exempt from the cuts. More recently, Iraq also demanded an exemption and is hoping to boost output.
- In short, even the best-case scenario for the OPEC meeting won’t be enough to spark a strong rally in oil prices.
Widening contango a warning sign
- The spreads between near-term oil contracts and those for delivery a year out are widening again, a trend known as contango.
- The contango is a symptom of short-term oversupply, as crude for front-month deliveries need to be discounted because of the glut.
- In other words, the futures market is showing signs of a persistent glut, lending evidence to the notion that oil prices might not rally for quite some time. The IEA does not see balancing until the middle of next year.
- The WTI and Brent time spreads are at their lowest point since January – less than -$4.00 per barrel – a time when crude crashed below $30 per barrel because of oversupply fears.
By the Numbers Report, part of the weekly premium publication, Oil & Energy Insider.
Improving battery technology and the coming wave of electric vehicles will cause a problem for global oil companies: demand for oil as transportation fuel will dry up and send investors fleeing, according to Fitch Ratings. Read… EVs May Send Big Oil into “Investor Death Spiral”: Fitch