Financial Analysis of Oil and Gas Market – September 2017

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In September, the price of Brent Crude and WTI Crude has steadily increased by 7%, capping the month at $56.12 and $50.58 respectively. Good news for an industry that not too long ago suffered from oversupply and a gut wrenching price collapse from more than $100 a barrel in mid-2014 to below $40 by the end of 2015.

Bubble size represents market cap


Description: Figure 1 highlights the performance of the oil and gas industry for the month of September 2017 (x-axis) and the performance of the 11 months prior to September 2017.

Over the past three years, oil cartel OPEC and other oil producing countries, who were hurting as well, agreed to do something about the supply glut. The recent increase in oil prices suggests these cuts in production to balance the supply and demand are working.

Helping gains in oil prices is China, which seems to be building its reserves. By taking in more than 8 million bpd, China is on pace to overtake the US as the biggest oil importer this year. OPEC expects exports from Mid-East to Asian countries to increase from 7.5 million bpd in 2016 to 22 million bpd by 2040.

One interesting fact that we are seeing occur over the past few weeks is the prices of Brent Crude and West Texas Intermediate, the US benchmarck, are diverging. At the time of writing, the WTI was trading at $50.16 and Brent at $55.73. This means that there is still a supply glut in the US, while the stocks in the international markets are tight. Also, we have to keep in mind the recent hurricanes Irma and Harvey, which disrupted oil refineries and transportation along the US Gulf States. According to Reuters, Harvey had forced a ~25% US refining capacity closure, along with ports and pipelines which cut off access to crude supply, thus leaving supply untouched and lowering prices. This happened amid US shale producers taking advantage of increasing prices to produce more. The EIA forecasts crude production will increase from 9.3 million bpd to above 10 million bpd in 2018.

Looking at the diverging prices between Brent and WTI and increasing supplies in the US, this encourages more exports to Asia, lifting WTI crude prices higher and narrowing the gap with the international benchmark. Just last year between the January to August period, China had taken only one cargo of under 1 million barrels. This year, China has bought 115,000 bpd from US.

If WTI continues to sell at a considerable discount to Brent, and if the supplies in the US keep increasing, this could create a case for Asia to become a clearing house for US crude, making deeper inroads in Asia and becoming more attractive to the players in the region as a tool for hedging.