US oil & gas sector: things to get worse before they get better

Fuel Fix ^ | February 1, 2016 | Matt Smith

[thackney]

Today is Harry Styles' 22nd birthday, and accordingly the crude complex is heading in one direction. (Down). We burst into February today, and get hit by a wave of global manufacturing numbers, as well as the ongoing debate re 'will-they-won't-they' cut production. (they won't).

China kicked things off overnight, setting a cautious tone with its worst official manufacturing print since August 2012. The Caixin manufacturing release also showed ongoing contraction from the sector, but in contrast was better than consensus.

Eurozone manufacturing was in line with consensus, boosted by Germany and Spain, held back by Italy and France. Japan was below consensus, but showing expansion; Brazil was above consensus, but showing contraction. The US is on deck shortly, likely showing ongoing contraction too.

The crude complex is getting a solid dose of the WBWs (whoop-bang-wallops) today, as Chinese economic worries weigh and expectations of a coordinated cut wane. The latest CFTC data show an interesting quirk; not only did we see short positions cut (that bit isn't so surprising), but we also saw speculative long positions increase significantly. This means that net-longs increased by the most (in percentage terms) since October 2010:

The chart below is from this piece over the weekend, which takes a look at the historical contribution of the oil and gas sector to the US economy. While in the late 1990s its share accounted for less than 1% of the economy (as the broader economy boomed), the deterioration of the sector in the midst of the great recession meant it was a drag on the economy in 2009.

Last year it accounted for 3.1% of GDP, but after providing a boost to the economy for the majority of the five-year period from 2010-2014, it has been dragging it lower for the last two quarters. That said, this drop doesn't account for the offsetting benefit from lower fuel prices.

Nonetheless, while emphasis remains on the lopsided oversupplied nature of the market, global demand is continuing to see the benefit of lower fuel prices. Bank of America suggest (via Bloomberg) that the mother lode of wealth transferance is underway. If the current price plunge persists, we will see the equivalent of $3 trillion a year being passed from oil producers to global consumers. Accordingly, the bank sees oil demand growth continuing to hold well above one million barrels per day, in a similar vein to our three musketeers - EIA, IEA, and OPEC.

Finally, it looks like things are going to get worse before they get better for the US oil and gas sector. According to IHS, North American E&Ps have only hedged 14% of their oil production volumes in 2016. Small US E&Ps have 47% of their oil production hedged for this year (at $74.31/bbl), while midsize US E&Ps have 43% hedged (at $60.54/bbl); large US E&Ps only have 6% hedged (at $53.85/bbl). This means 2016 is set to be a year of increasing financial stress on the sector, amid dwindling revenues...

[thackney]

[Nervous Tick]

>> whoop-bang-wallops

Okay, enough of that oil patch technical jargon. Not all of us are petroleum engineers. :-)

[T-Bone Texan]

I love your effusive optimism.

It really helps get me through the day!

[TexasCajun]

And there I was enjoying Cruz's victory in Iowa and then I clicked your post.

I know, I know. ...not your fault. :)