By Matt Smith
One hundred and ninety years to the day after Samuel Morey patented the internal combustion engine, and the combination of Saudi rhetoric and a solid jobs report has switched off the ignition for any crude rally today, sending prices free-wheeling downhill fast. Hark, here are seven things to consider on this April Fool’s Day:
1) We’ve had more economic data out overnight than we can shake a stick at. But we’ll give it a good try. Kicking things off last night, we had Chinese manufacturing data. The official PMI was the highest since last June, and showing expansion for the first time since last July. As for the Caixin PMI, it too showed improvement, but remained in contractionary territory (at 49.7).
2) On to Europe, and the Eurozone manufacturing PMI was also better than consensus, up to 51.6 – led higher by Germany, Italy, restrained by Spain. Blighty bucked the positive trend, however, as UK manufacturing missed expectations.
3) Across to the Americas, and Brazil’s economy continued to exhibit weakness – this time via a 2.5 percent drop in industrial production in February (YoY, however, it was not as bad as expected, down 9.8 percent). On to the U.S., and nonfarm payrolls – aka the official monthly unemployment report – was fairly rosy, with job creation better than expected last month at 215,000. The unemployment rate ticked higher to 5.0 percent, but this was due to the participation rate increasing to a 2-year high (mo’ people looking). The official U.S. PMI manufacturing number was better than expected, at 51.8.
4) While the unemployment report has provided a boost to the U.S. dollar as rate hike expectations increase, the primary reason that oil prices are being dealt a solid dose of the WBWs (whoop-bang-wallops) today lies with Saudi Prince Mohammed bin Salman.
The King’s son threw cold water (hot water?) on hopes of a production freeze, saying that Saudi Arabia would only consider such a move if Iran and other major producers do so. The likelihood of Iran cutting production is unlikely to say the least – our ClipperData show Iranian crude exports to India surged to over 500,000 bpd last month, more than double what has been seen in recent years – hence oil prices are heading south once more.
The Saudi Prince also discussed a plan to raise funds by issuing shares in Saudi Aramco. The graphic below highlights the enormity of the state-run oil company; it controls about ten times the oil reserves held by Exxon Mobil. Based on a valuation of $10 a barrel, it would be worth $2.5 trillion.
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5) The need to raise cash is to plug its swelling deficit, left by the drop in oil revenue:
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6) Today’s post out on RBN Energy highlights the changing dynamics in U.S. crude flows since the lifting of the U.S. export ban; it is penned by the mighty Abudi Zein, and is powered by our ClipperData.
The chart below from the piece is absolutely great; it highlights how the ramp up in crude and condensate exports to international markets since the lifting of the oil export ban has been offset by a drop in exports to Canada. The start up in November of Enbridge’s reversed line 9B pipeline in combination with bargain basement barrels from the North Sea and West Africa means that crude exports have not been increasing this year:
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Source: RBN Energy / ClipperData
7) This final graphic highlights how oil and gas companies that have slashed their spending have seen their share prices fair the best.
Companies such as Anadarko, Continental and EQT have cut their budgets by more than half this year, and their stocks have risen considerably because of this.
Nonetheless, the bi-annual redetermination period is nearly upon us, and after borrowing bases were only cut by 11 percent last time around in the fall, a new round of credit line reassessment could be much more severe.
Whiting Petroleum, the largest producer in the Bakken, estimates that its borrowing base will be cut by 38 percent, while WPX energy has said it has already been dealt a 30 percent reduction.
Banks will likely walk a fine line, however, cutting company credit lines enough to protect their interests, but not by so much that they send these companies tumbling into bankruptcy.