Oil Markets
Posted: Thu Sep 03, 2015 12:05 pm
The note below was received this morning from our good friend Mike White at Roth Capital. Mike is an expert on the energy sector. He covers a lot of the small-cap E&P companies.
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What To Do With the Stocks - Our advice is to adhere to simple fundamentals. At current commodity price levels, cash flows are under strain; it is our opinion investors should stick with stocks of companies with high quality assets, strong balance sheets and solid management teams. Under ROTH coverage these companies are: FANG, EPM, ESTE, REI, RSPP and SYRG.
Data points that have been moving crude oil prices:
Negative Demand Data Points
> Growth in the U.S. manufacturing sector slowed in August to its weakest in over two years, with the ISM’s index of national factory activity falling to 51.1 from 52.7, marking the lowest reading since May 2013. Consensus expectation was 52.6.
> China's official manufacturing purchasing managers' index (PMI) edged down to 49.7 in August from 50 in July.
> South Korea’s exports fell 14.7% last month from a year before, the biggest decline since August 2009. Domestic consumption also slumped, pulling imports down 18.3% in their biggest drop since February.
Positive Supply Data Points
> On Monday the data point was the EIA monthly U.S. oil production report, which showed a production of 9.3 million barrels per day, 104,000 barrels per day lower compared to May and a more impressive 316,000 barrels per day drop compared to April. This is significant because earlier this year the crude oil market rallied in March through mid-June in anticipation of lower production figures for the month of April (two month lag) and was disappointed with the actual increase in April production compared to March. This increase in April production sent crude oil into its second leg of the crash that initially started in 4Q 2014. The EIA report Monday provided what the market was looking for in May and June.
> Can we declare a new bull market in crude oil? Likely not based on this one data point, in our opinion, but it’s a step in the right direction. We continue to believe the markets for crude oil and energy equities need steady and reliable evidence/reports of supply contraction and demand resilience before declaring the new bull market. [Based on what I heard at EnerCom, U.S. production declines will accelerate during the 4th quarter because of a steep drop in well completions. - Dan]
> The recent OPEC Bulletin led with the an article titled: “Cooperation holds the key to oil’s future,” suggesting the Gulf states may blink before the U.S. shale boys buckle. At this point, in our view, this is just talk.
> The conclusion of Pemex’s hedging program, in our view, removes a bearish overhang for the crude oil markets. According to reports, the Mexican finance ministry finished its 2016 oil hedging program purchase covering 212 million barrels at a cost of $1.09B ($49/bbl average price). The dealer risk management and speculative trades around this effort likely put price pressure on the front month during mid-August.
> Royal Dutch Shell (RDS-NC) has shut down two key supply pipelines in Nigeria because of leaks and sabotage. Effective last Thursday, RDS shut down both the Trans Niger Pipeline and Nembe Creek Trunkline. The two pipelines take crude to the Bonny Light exports terminal, one of Nigeria's main oil terminals. Shell did not disclose the volume of output affected by the incident.
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What To Do With the Stocks - Our advice is to adhere to simple fundamentals. At current commodity price levels, cash flows are under strain; it is our opinion investors should stick with stocks of companies with high quality assets, strong balance sheets and solid management teams. Under ROTH coverage these companies are: FANG, EPM, ESTE, REI, RSPP and SYRG.
Data points that have been moving crude oil prices:
Negative Demand Data Points
> Growth in the U.S. manufacturing sector slowed in August to its weakest in over two years, with the ISM’s index of national factory activity falling to 51.1 from 52.7, marking the lowest reading since May 2013. Consensus expectation was 52.6.
> China's official manufacturing purchasing managers' index (PMI) edged down to 49.7 in August from 50 in July.
> South Korea’s exports fell 14.7% last month from a year before, the biggest decline since August 2009. Domestic consumption also slumped, pulling imports down 18.3% in their biggest drop since February.
Positive Supply Data Points
> On Monday the data point was the EIA monthly U.S. oil production report, which showed a production of 9.3 million barrels per day, 104,000 barrels per day lower compared to May and a more impressive 316,000 barrels per day drop compared to April. This is significant because earlier this year the crude oil market rallied in March through mid-June in anticipation of lower production figures for the month of April (two month lag) and was disappointed with the actual increase in April production compared to March. This increase in April production sent crude oil into its second leg of the crash that initially started in 4Q 2014. The EIA report Monday provided what the market was looking for in May and June.
> Can we declare a new bull market in crude oil? Likely not based on this one data point, in our opinion, but it’s a step in the right direction. We continue to believe the markets for crude oil and energy equities need steady and reliable evidence/reports of supply contraction and demand resilience before declaring the new bull market. [Based on what I heard at EnerCom, U.S. production declines will accelerate during the 4th quarter because of a steep drop in well completions. - Dan]
> The recent OPEC Bulletin led with the an article titled: “Cooperation holds the key to oil’s future,” suggesting the Gulf states may blink before the U.S. shale boys buckle. At this point, in our view, this is just talk.
> The conclusion of Pemex’s hedging program, in our view, removes a bearish overhang for the crude oil markets. According to reports, the Mexican finance ministry finished its 2016 oil hedging program purchase covering 212 million barrels at a cost of $1.09B ($49/bbl average price). The dealer risk management and speculative trades around this effort likely put price pressure on the front month during mid-August.
> Royal Dutch Shell (RDS-NC) has shut down two key supply pipelines in Nigeria because of leaks and sabotage. Effective last Thursday, RDS shut down both the Trans Niger Pipeline and Nembe Creek Trunkline. The two pipelines take crude to the Bonny Light exports terminal, one of Nigeria's main oil terminals. Shell did not disclose the volume of output affected by the incident.