Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

The wistfulness of the Labor Day weekend is especially pronounced in the oil market. The summer driving season draws to a close and refineries prepare to shut down for routine maintenance. Little wonder oil prices have fallen in 8 of the past 10 Septembers, something pointed out in a recent report by Citigroup.

Dog Days
Like this time last year, oil yo-yos in the $40-$50 range
Source: Bloomberg
Note: Generic 1st-month Nymex crude oil futures price.

This year, the oil market enters the fall definitely lacking all conviction -- as Friday's payroll numbers showed.

The mix of gives and takes in the headline numbers -- weak-ish August gains, better July figures, sluggish hours and wages -- leaves open the central economic question of when the Fed next raises rates. Oil prices ticked up a little when the payrolls hit the wires, but that likely reflected a thin sigh of relief, following the mildly hawkish tone coming out of Jackson Hole last week. Oil has started to become more negatively correlated with the dollar in recent months, Bloomberg data show, itself a sign of a lack of real direction. In any case, the relationship remains weak for now.

Seeking Direction
Oil's inverse relationship with the U.S. dollar has come back, sort of
Source: Bloomberg
Note: Data show rolling 90-day correlation coefficient for the generic 1st-month Nymex crude oil futures price and the spot U.S. dollar index.

The glut of crude oil and refined products is what deadens any sign of life in oil prices. A build-up in U.S. inventories reported earlier this week was reported as surprising relative to expectations, but it's really stretching the definition of "surprise" to apply it to oil stocks at this point. It's been apparent for months now that U.S. gasoline demand wasn't the savior it was touted as in the spring.

So we are back to relying on a deus ex machina to jolt prices above $50 a barrel. In a wide-ranging interview with Bloomberg published on Friday, Russian president Vladimir Putin revived the prospect of a supply freeze deal with OPEC, ahead of the oil-exporting group's informal talks in Algiers later this month.

Putin's willingness to risk even the mildest embarrassment if nothing materializes freeze-wise, as happened at Doha in April, is worth noting. But with OPEC clocking up record production in August, according to a Bloomberg survey, it's hard to have much faith in anything real coming out of the talks. And don't forget, with Saudi Arabia reportedly aiming to sell $10 billion worth of sovereign bonds and the Kremlin considering selling off a big chunk of Rosneft, two key players have good reason to gin up sentiment on oil prices in the short term.

What's more, rhetorical support for oil prices comes at a cost to producers like Russia -- it throws a lifeline to U.S. E&P companies that actually are cutting production in the face of low prices. The underlying data in Friday's jobs numbers showed the sector is still suffering mightily, but with tentative signs of job cuts there bottoming out.

The number of workers engaged in oil and gas extraction actually rose in August, and the numbers for June and July were revised up slightly. Adding in support workers for the sector -- where the data are lagged to July -- shows the pace of job cuts in the oil patch could be turning.

Merely Dreadful
The severe downturn in oil and gas payrolls shows signs of bottoming out
Source: Bureau of Labor Statistics
Note: Data show year-over-year change in combined extraction and support payrolls.

The summer rally in oil prices helped alleviate the burden of wages on E&P finances. Using monthly price and output data, it's possible to construct a crude measure of the industry's revenue, ignoring regional differentials and royalties. Meanwhile, BLS data on employment, hours and average wages can be used to estimate a rough overall wage bill for the sector. You can see the impact of the rally here:

Pay Rolls
The implied wage burden on E&P revenue has dropped sharply since February as oil prices rallied
Source: Bureau of Labor Statistics, Bloomberg, Energy Information Administration, Bloomberg Gadfly analysis
Note: Assumes U.S. natural gas output was flat in July vs. June.

Notice, though, that the burden ticked up again in July as oil prices started falling. August's price rally, predicated largely on revived hopes of an OPEC production freeze, likely sent that line back down (we'll know in a month's time).

The point is that the oil market is rebalancing. While there are pockets of strength in U.S. shale -- notable the Permian basin -- supply there continues to fall. But it is a gradual process. And while Algiers shimmers on the horizon, any price support coming from the mouths of OPEC officials also serves to take the pressure off E&P companies. As the rhetoric mounts in the weeks ahead, beware those full of passionate intensity.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net