Global oil inventories reached all time highs of 2.975 billion barrels. U.S. inventories stand at all-time highs of 482 million barrels.
Global oil supply exceeded demand by 1.47 million barrels per day in 2015. Despite healthy demand growth forecasted at 1.2 million bpd in 2016, supply will mostly likely outpace demand.
Saudi Arabia's $640 billion currency reserves and the potential for a Saudi Aramco IPO are a "checkmate" scenario for highly leveraged and high cost U.S. Shale producers.
Let me be clear, this isn't a direct buy or sell recommendation when it comes to oil of the U.S. Oil ETF (NYSEARCA:USO). Instead, this is a food for thought piece as I continue to read articles and commentary written by some SA authors and readers that suggest that oil will experience a sharp rebound in 2016. I am not smart enough to pretend that I can accurately forecast the future price of oil, but these articles seem to be based more on hope than rational thought or empirical evidence.
Unlike coal or natural gas prices, which are mostly U.S. centric markets because of the high costs to export, the oil market is truly a global market. Notwithstanding the rational adjustments for quality (light vs. heavy, sour and sweet, etc.) as well as transportation costs and currency adjustments, prices move in tandem, especially with the lifting of the U.S. export ban. The spread between Brent and WTI is near parity. As we can see below, compliments of the CME Group, spot oil closed Friday at $33 per barrel for WTI. One of the few glimmers of hope for oil bulls is the steep market contango that helps midstream owners of oil storage in various forms.
The world’s biggest energy companies have a tough decision to make amid languishing oil prices: Do they keep their coveted investment grade credit ratings or maintain century-old practices of paying shareholders annual dividends worth billions in cash?
Exxon Mobil Corp. and its peers are grappling with the collision course between the two, which appears unavoidable as crude continues to hover around $30 a barrel. Even with announced spending cuts that exceed $92 billion, producers are losing money on almost every barrel they take out of the ground. Paying dividends makes their cash shortfall even worse.
Four of the biggest Western oil companies—Exxon, Royal Dutch Shell PLC, Chevron Corp.and BP PLC—are poised to pay more than $35 billion in dividends to investors this year, an amount equal to about 40% of their combined cash flows, says Oppenheimer & Co. To do so, they face increased pressure to borrow, a strategy that has alarmed ratings firms.
“The question is, how bad are things going to get in 2016?” said Simon Redmond, director of oil and gas corporate ratings at Standard & Poor’s Ratings Services. “For a company to focus on continued cash distribution is not credit positive.”
According to a new report from the Oxford Institute for Energy Studies (OIES), Gazprom might consider a strategy to flood Europe with cheap gas in 2016 to kill off U.S. LNG.
Such a scenario would be possible because Gazprom has 100 billion cubic meters of annual gas production capacity sitting on the sidelines in West Siberia, which can effectively be used as spare capacity, not unlike the way Saudi Arabia can ramp up and down oil production to affect prices. Gazprom’s latent capacity is equivalent to 3 percent of global production. This large volume of capacity is the result of investments that were made in a major project on the Yamal Peninsula back when gas markets looked much more bullish.
The approach would mirror Saudi Arabia’s strategy of keeping oil production elevated in order to protect market share, forcing the painful supply-side adjustment onto higher-cost producers. Crucially, Gazprom can produce and export gas to Europe at a much lower cost than LNG from across the Atlantic.
Gazprom’s cost to export gas to Europe stands at $3.50 per million Btu (MMBtu), according to figures from OIES. That easily undercuts the cost of landing LNG in Europe from the U.S., which OIES says costs American exporters $4.30/MMBtu. Even that is probably generous – other estimates peg U.S. LNG export costs to Europe at somewhere around $5/MMBtu for liquefaction and transportation, plus the cost of procuring the gas from U.S. gasfields, which today runs a little bit above $2/MMBtu.