Is EIA reporting correct data about US oil stockpiles?

Ever since the talk about global oil glut has got louder, I have been trying real hard to find out the factors responsible for the prevailing oversupply. The recent stories published and aired suggest that OPEC, led by Saudi Arabia, is responsible for the steep fall in prices. The price per barrel has plunged to US$35 from its peak of US$147 and currently hovers around US$50. A question came to my mind, is Saudi Arabia the only culprit?

Having spent weeks on finding a plausible reason, I reached a very disturbing point. My conclusion is that the stories being published and aired by western media are based on a few premises, which are incorrect and misleading. The biggest factor that moves oil price is weekly US stockpile data released by the US Energy Information Administration (EIA). In the recent weeks, it has reported sudden rise and fall in US stockpiles, which resulted in high volatility in crude prices. Most of these spikes were reported at a time when the world was following OPEC-led effort to contain glut.

Today, I read shocking news that millions of barrels of oil produced in US remain unaccounted for. This raises a question, is EIA reporting correct data about US oil stockpiles? Ideally one should trust that EIA is not providing misleading information. However, keeping the track record of US intelligence agencies in mind; one has a reason to question the sanctity of the data disseminated by EIA.

The data released by EIA about crude oil inventories influences its price. If the increase in crude inventories is more than expected, it implies weaker demand and is bearish for crude prices. The same can be said if a decline in inventories is less than expected. If the increase in crude is less than expected, it implies greater demand and is bullish for crude prices. The same can be said if a decline in inventories is more than expected.

The reason for doubting the sanctity of data disseminated by EIA is little disclosure about shale oil production. The number of operating rigs reported by some service provider is still less than 500, as against an installed number of more than 1900 touched in 2014. This suggests that around one-fourth of installed rigs are operating for almost three years. What has the fate been of remaining three-fourth? How many of them have filed bankruptcy under Chapter 11? If no such report has been made public, one has all the reasons to doubt the authenticity of EIA data.

Morale of the story, EIA is diverting the attention of the world from US crude production to Saudi Arabia, Russia, Iran and Iraq to hold them responsible for the glut. One should also keep in mind that US has also been the biggest beneficiary of low crude oil prices, being the biggest consumer of energy.

Can oil prices continue upward trend?

One of the questions haunting exploration and production (E&P) companies is how soon and how much oil prices will go up by end of this year? Te reply is simple, hike in price is dependent on how much output producers are willing to relinquish.

Therefore the first point to explore is who will take the lead in cutting down output first.

The western media is still keeping the hype that Saudi Arabia has to cut its output but the biggest stumbling blocks are Iran and Iraq. It continues to spread disinformation that since Saudi Arabia and Iran continue to be the worst foes, any reduction in output by Saudi Arabia remains a remote possibility.

According to a Reuters report, "Oil rose to a one-year high on optimism regarding a future agreement between OPEC and major producers to restrict output"

It also said, "Significant doubts whether they (production cut targets) will actually be fulfilled due to the rivalry between OPEC members, who are fighting aggressively for global markets share, could prevent an effective deal.”

As per report, Goldman Sachs said in a note to clients on Tuesday that despite a production cut becoming a "greater possibility", markets were unlikely to rebalance in 2017. The rationale was, "Higher production from Libya, Nigeria and Iraq is reducing the odds of such a deal rebalancing the oil market in 2017 and even if OPEC producers and Russia implemented strict cuts, higher prices would allow U.S. shale drillers to raise output.

Initially, I had a point of view that most of the shale oil producers were unable to continue production below US$50 barrel due to accumulated losses. Now, believe that they have withstood the test, which is evident from the persistent increase in tnumber of active rigs. However, the number of operating rigs is still less than 25% of total installed rigs.

Moral of the story is that shale oil producers are more anxiously awaiting hike in price but out of desperation they want to increase the number of operating rigs and snatch Saudi share as early as possible. They have invested billions of dollars hoping that oil price would not fall below US$50/barrel. The crash that began in 2014 has shattered their dreams. Even geopolitical turmoil in MENA has failed in deterring OPEC members, mostly located in the region where proxy wars have been going on for more than last two years.

Pakistan Stock Exchange witnesses 14.5% surge in trading volume

During the week ended 7^th October 2016, the trading volume at Pakistan Stock Exchange surged by 14.5 %WoW. The surge came despite rising cross-border tensions and political noise. The benchmark Index closed at 41.200 level.

The factors keeping the market buoyed included the response from global debt market for Pakistan's international Sukuk, positive outlook on Pakistan's banks from Moodys Investor Services and consolidation in global oil benchmarks.

The key news driving the market included: 1) Pakistan issued US$ one billion Sukuk of 5-year tenor at 5.5 percent, 2) some 17 foreign and local strategic investors, including Chinese and US stock exchanges initiating due diligence process for buying 40% stake Pakistan Stock Exchange (PSX) by end November this year, 3) Central Development Working Party (CDWP) approved 23 projects worth Rs31.5 billion, 4) cement dispatches rose 8.3%YoY during first quarter of current financial year with capacity utilization during the quarter rising to 79% and 5) The federal cabinet approved draft Bill for Regulation for Benami transactions according to which any property held in "Benami" can be confiscated by the Government of Pakistan.

Gainers at the bourse were: LOTCHEM, SHEL, SNGP and DAWH. Laggards were: HCAR, PSMC and, PPL. Volume leaders were: BOP, PIAA, PACE and WTL.

Next week will be shortened due to Ahura holidays by two days, likely to keep trading activity muted. Results season coming in mid‐October is likely to offer some triggers may. There is also room for price performance in selected Banking scrips on potential positive surprises from capital gains.

The takeaways from September 2016 included: 1) Pakistan’s central bank leaving interest rate unchanged, 2) members of OPEC tending to agree on containing supply glut by curtailing output and 3) monetary policies of US Fed and BoJ guiding sentiments and performance consequently. That said, political concerns both at home and across the border escalated, restricting gains to a certain extent. Out of the mainboard sector posting major gains were, Autos, Telecommunications and Textiles, while Cements were down on emerging price war concerns amid the recent flurry of expansions by players and Fertilizers due to the reduction in urea prices amid slower offtake. Heavy participation continued in mid‐tier stocks resulting in increased trading volume. Foreigners continued to shy away from the market, selling equities worth US$41.3 million as against selling of US$20.4 million in August 2016.

The cement sector witnessed robust margin improvement backed by declining coal/FO prices to record low levels. Lately, coal price surged due to stringent rules for mines in China, EU's plans to reduce coal usage by 14% in next seven years and tighter supply. Coal price may hold its ground if oil price stability is achieved through OPEC's coordinated output control. In this backdrop, analysts fear a decline in earning. Fears of pricing indiscipline grew with the announcement of the addition of 12.1 million tpa capacities. However, robust domestic demand and normalized exports are expected to keep interest alive.

Has Saudi Arabia accepted its oil policy was faulty?

Saudi Arabia leading the oil cartel, Organization of the Petroleum Exporting Countries (OPEC) has surprised oil traders and analysts by announcing a production deal at the end of a recent but informal meeting in Algiers. This is after a long time that Saudi Arabia has consented to production cut. In 2014, against all odds Saudi Arabia had decided to enhance output for retaining its market share.

At Algiers, OPEC members committed themselves to an overall output level. The cartel issued a statement comprising of less than 700 words, out of these the two most important announcements were: 1) commitment by 14-member cartel to fix a maximum ceiling of 33 million barrels daily out (bpd) and 2) announcement to establish a committee to study the implementation of fixing new production levels for individual member countries and to consult with non-OPEC oil producing countries.

The critical question remains whether the production target will affect the actual number of barrels being marketed by the organization's members?

In response to the OPEC decision, oil prices settled mixed on Friday while posting their second straight monthly gain. While skepticism prevailed about the cartel's pledge, some analysts believed that the global oversupply at the maximum is around 1.5 million bpd. This can be managed easily if every member acts prudently. Saudi Arabia has the highest responsibility to set precedence by cutting its output up to 750,000 bdp and also to reap the highest benefits. Some analysts believe that Saudis probably calculated that an increase in prices to $50-60 per barrel would bring useful extra revenue to them without stimulating too much production from other sources due to some prevailing constraints.

If one looks at OPEC's latest production figure, it prompts even bigger cut. They are all Petro states suffering from low oil prices. It is prudent for them to cut production a little voluntarily and get a meaningful increase in their revenue. The mere announcement about production cut has raised oil price by more than 5 percent and actual cut could bring even higher gains.

Russia, one of the arch rival of Saudi Arabia in geopolitical arena, has been producing/pumping crude at record highs, said it would find a way to freeze production if a deal is reached with OPEC. The US ‑ present foe but a friend of yester years, also a non-OPEC member and now the biggest oil producer ‑ said on Thursday it had little faith in the OPEC plan. U.S. energy envoy Amos Hochstein told Reuters that any price gains from the cuts would trigger higher U.S. production, which would ultimately defeat the deal. This is a real treat as a weekly report about U.S. oil rig count showed local drillers have added 95 rigs for the third quarter, the most in any quarter since 2014.

Within OPEC and besides Saudi Arabia, supply has risen since 2014 as OPEC relinquished its historic role of fixing output to prop up prices as Saudi Arabia, Iraq and Iran wanted to pump more oil.  Supply from Iran, another arch rival of Saudi Arabia has posted the fastest increase in exports after the lifting of Western sanctions. Its production is inching towards the pre-sanctions levels.

The kingdom’s change of heart seems to have come from a realization that low oil prices were not rebalancing the market in the way that official hoped. Lower prices were expected to curb production by other producers with higher costs while improving the kingdom’s long-term position. Shale production in the US has been falling since early 2015 but it has been more than offset by increasing output from OPEC members.

The kingdom’s strategy assumed that it had sufficient financial resources to withstand a prolonged period of low prices while competitors would be forced to scale back. But the downturn in oil prices has lasted much longer than and shows no sign of ending. Falling oil revenues have pushed the kingdom’s economy close to or into recession and forcing deep cuts in government spending on infrastructure as well as social payments and salaries. Saudi Arabia’s foreign reserves have declined by $182 billion, a fall of nearly 25 percent, since August 2014

The decision certainly shows a strategic shift at the top of the Saudi administration, where Deputy Crown Prince Mohammed bin Salman has emerged as the key decision-maker. Prince Mohammed indicated earlier this year, it would not matter for the kingdom whether oil prices were $30 or $70 per barrel. But in recent months officials have realized that prices are unsustainably low and want them to rise.

Moral of the story is that Saudi policymakers are making another big assumption that rival producers have little capacity to raise output in the short term. They may be partly right because Iran is close to its pre-sanctions production capacity and will need significant investment to achieve substantial increases in output. Russia too probably has limited ability to increase production in the short term.

However, the key threat that remains is a potential increase in shale production in the meantime. U.S. shale companies have already added more than 100 drilling rigs since the end of May, despite the fact that the sector remains under intense financial pressure.

Hike in global oil price drives Pakistan stock market

Despite recent political flares up the benchmark of Pakistan Stock Exchange PSX‐100 index closed at 40,542 levels for the week ended 30^th September 2016. The rally was primarily driven by index heavy-weight energy companies due to upward move in international oil prices and decision of the central bank to leave interest rate unchanged. Average daily volume for the week came down to 528.3 million shares as compared to 727.8 million shares a week ago. The volume leaders were: BOP, PACE, WTL, KEL and TRG. Performance leaders during the week were: INDU, SHEL, PSMC and LOTCHEM; while laggards included: MEBL, NBP, KAPCO and HASCOL.

Key news flows during the week included: 1) ICL launches new caustic soda IEM plant‐2 (Phase‐II) having capacity of 25,000 tons with a total project cost of Rs750 million, 2) ICI revealed its plan to set up a facility in Pakistan to manufacture Morinaga infant formula products in partnership with Morinaga and Unibrands, 3) public announcement of offer to acquire 49.8 million ordinary shares of EFOODS by FrieslandCampina at Rs151.85/share, 4) Executive Board of the IMF on 28^th September completed the 12^th review of Pakistan's 3-year economic reform program enabling the disbursement of the final tranche of about US$102 million, 5) China‐led Asian Infrastructure Investment Bank (AIIB) approved US$300 million loan to fund the expansion of a hydropower project in Pakistan, and 6) GoP expressed plan to raise US$1.00 billion from the international debt market through issuance of Sukuk in October this year.

Selling by foreigners also eased out during the week under review with net outflows declining to US$8.6 million from considerably high net outflows of US$16.04 million a week earlier. With result season nearing its end, a few market triggers are expected in the near term. However, political risk remains in place with PTI’s protest to continue in the days to come and recent tension between Pakistan and India may keep investors cautious. Following the OPEC’s hint to cut production for the first time in eight years, sent crude prices higher by more than 6%, which is likely to keep interest intact in index heavy weight energy companies.

Oil producers’ cartel, OPEC has hinted towards capping/cutting production in its informal meeting in Algiers. While details are expected to be finalized in the group's formal meet in November this year, the mere indication to cap/cut output raised oil prices by 6%. With expectations now tilting towards higher oil prices, analysts try to work out possible implications of the decision on the market AKD Securities report indicates that its E&P universe is likely to benefit the most with 4.2% higher FY17 anticipated earnings for every US$5/bbl increase in oil prices. OMCs on the other hand can lose out on retail fuel demand moving towards cheaper alternatives. Additionally, in the backdrop of higher oil prices, macro stability remains at risk with concerns emerging on: Balance of payment and exchange rate, good for export-oriented Textiles and IPPs with dollar-denominated revenues and fear of sharp escalation in inflation and its subsequent impact on interest rates.

Despite a challenging operating environment (super tax imposition, spreads at decade low), fundamental improvements by National bank of Pakistan (NBP) in areas is encouraging. The most prominent in this regard are: 1) growth in net interest income (NII) up 9%YoY and 31%QoQ and visible improvement in asset quality due to provisions down by 78%yoy and 48%QoQ in 1HCY16. With regards to the former, the bank has effectively brought down its domestic cost of deposit to 3.8% from 5.3% in 1HCY15 by building on its CASA. While credit quality concerns have not abated completely, these have been continually improving with NPL ratio coming down to 17.8% in June'16 as compared to 18.4% in December'15. Consequently, profitability in 1HCY16 has remained strong registering growth of 28%YoY/51%QoQ.