Sunday Morning Note (Aug 16, 2015) …

Sunday Morning Note ...Last week we started on Page Two of this blog a new weekly column, “Sunday Morning Note ….”  As we said there, “Sunday mornings are normally the time that I sit back, make an extra pot of coffee, and catch up on some of the past week’s data. Since I am doing them in any event I thought I would start throwing them up here, both as another place to capture them and to make them available to anyone else who may find them of value.”

Last week’s Note is available here.  Based on the strong response, this and subsequent weeks we are moving the Note over to the main page as a regular feature of this blog.  It will be used as a place to capture some data, and if useful, a note or two about things that arose during the week  we missed at the time, or are useful to capture again.

This past week’s data:

Sunday Note (8.16.2015)

The source of the data is explained further here. Basically, the oil numbers are the Friday settle price, as reported on the CME Group website for the indicated month (in this case, September) for West Texas Intermediate (WTI) and Brent for the immediate, one-year, two-year and, just for grins, five-years forward.

The natural gas/LNG data is the same, from the same website, for Henry Hub and Platt’s “Japan Korea Marker” for the relevant month.  As explained further on the reference page, “BGK” is an attempt to report a global crude oil price on an MMBtu basis as a very rough measure of the “Japan Customs-cleared Crude,” or what sometimes is referred to as the “Japan Crude Cocktail” (JCC), which is used with some lag as a starting point for most Japanese (and elsewhere in the Asian Pacific region) LNG purchase contracts.

This week’s data compared to last show the effects of the continued drop this week in immediate WTI.  Last week’s price for September 2015 WTI was $43.75.  This week’s is down an additional 2.8%, to $42.50.

Somewhat overlooked in the headlines, however, is that as bad as the week was for immediate WTI, it was not as bad for Brent and as importantly, farther out price levels.  While it dropped, Brent’s September 2015 close this week was within 0.6% of its close the prior week, the Friday close for WTI futures for 2016, 2017 and 2020 were actually up this week compared to the previous week, and Brent futures for the same period were largely unchanged.

And more relevant to Alaska, the depth of the drop in the ANS price based on the available data does not appear to be as dramatic as for either of the other crudes.  According to the most recent data available from the Department of Revenue, ANS dropped from $49.95 at the close of last week, to $48.52 by Thursday of this week, a drop to be sure, but still to a level significantly  (14%) above WTI and on relative par with Brent.

Still, as the futures markets indicate, oil prices remain in a very difficult and uncertain environment.  Although Brent and the longer term forecasts may have steadied in the past week, the drops experienced over the past month have been dramatic and, unfortunately for producers (and the state of Alaska is one of those), have fulfilled the promise several saw earlier in the year for a second price reset once summer demand started to subside.

During the week both the US Energy Information Agency (EIA) and the International Energy Agency (IEA) issued their monthly oil reports.  In different ways, both captured the significance of the price downturn this past month and its effect on at least the near future.

The August EIA Short-Term Energy Outlook summarizes the past month this way.

North Sea Brent crude oil prices averaged $57/barrel (b) in July, a $5/b [8%] decrease from June. Brent crude oil spot prices fell further in early August, settling at $48/b [a 22.6% decline from June] on August 7. The recent price declines reflect concerns about lower economic growth in emerging markets, expectations of higher oil exports from Iran, and continuing actual and expected growth in global inventories.

Projecting the continued effect of those concerns, in the report EIA substantially revises the near term price forecast it had issued just the previous month, dropping its 2015 Brent projection further by $6/bbl (10%) to $54.40/bbl, and its 2016 Brent projection $8/bbl (12%) to $59.42/bbl.

Hi-lighting its significance, it is worth noting that this is the first time EIA has reduced the 2016 Brent crude forecast below $60. EIA is now estimating WTI  in both years to average $5/bbl less than Brent.

The August IEA Oil Market Report trends in the same direction.  It also starts by noting the dramatic events of the previous month:  “Crude oil prices fell sharply during July and into early August, pressured by an abundance of supply and a strong US dollar. By early August, global benchmarks had sunk around 25% below end June levels. At the time of writing [August 12], ICE Brent was trading at around $49 /bbl while NYMEX WTI was at $43.30/bbl.”

IEA appears to see some more promising signs, beginning with what it perceives as the start of a demand response to lower prices.  “Oil’s plunge below $50/bbl from triple digits a year ago has seen demand react more swiftly than supply. As a result, the world is now expected to use 1.6 mb/d more fuel in 2015 than the previous year as economic growth consolidates and consumers burn more oil. That’s the biggest growth spurt in five years and a dramatic uptick on a demand increase of just 0.7 mb/d in 2014.”

Like the EIA, IEA’s view in the near term is tempered by continuing supply strength.  “On the other side of the equation, global supply continues to grow at a breakneck pace – currently running 2.7 mb/d above a year earlier – despite a collapse in oil prices. Muscular pumping from OPEC’s top producers Saudi Arabia and Iraq has boosted the group’s flows to 31.8 mb/d – the highest in three years. Since the Riyadh-led OPEC decision last November to defend market share rather than price, output from the 12-member group has soared by 1.4 mb/d and it looks as if there is no backing down.”

Unlike the EIA, IEA tries to end its analysis on longer-term uptick.  “Against this backdrop, many participants in the oil industry have adopted a new mantra – “lower for longer”. But how low and how long? While reduced capital spending will help rebalance the market in the short term, it will no doubt also lead to lower future supply growth. This will become increasingly sensitive if demand continues above-trend, as it has so far in 2015.”

In the end, even IEA effectively admits, however, that such an outlook doesn’t account for additional shoes that are yet to drop, noting that its forecast of potentially reaching supply/demand balance late next year, for example, “does not include potentially higher Iranian output in the case of sanctions being lifted.”

The net effect is to make clear that the market has a long and what promises to be a continued, highly tortuous way to go.

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