(IBTimes) - Confusion in Europe and macroeconomic data that is
still suggesting a global economic slowdown has kept both equity
and commodity markets on the defensive for most of the week.
Overnight the latest data out of China supported the view of not
only the developed world economies slowing but the main economic
growth engine of the world also continuing to slow...China.
China's industrial production grew at the slowest pace since 2009
while Yuan or China currency denominated loans missed estimates
but the latest inflation number came in lower than expected.
China's industrial output increased 9.3% year on year or a
large negative surprise versus projections while Yuan loans came
in at 681.8 billion Yuan versus expectations of 780 billion Yuan.
Both negative indicators and strongly suggestive that the Chinese
economy is slowing. On the positive side of the data release the
latest inflation indicator (
) came in at 3.4% year on year and staying below the governments
threshold for the third month in a row.
The data last night as well as the macroeconomic data that has
already been released is strongly suggesting that the Chinese
government is likely to get more aggressive in easing and/or
stimulating its economy as inflation does not seem to be an issue
at this point in time. If China does get more aggressive they
will join the rest of the world economy that is still primarily
living on some form of stimulus and classic monetary easing
program. Additional easing in China is supportive for the Chinese
economy as well as for most traditional commodities. If China's
economy does turn around and starts to expend demand for oil and
the broader commodity complex will increase. At the moment the
oil and commodity markets are not reacting much to the prospects
of China getting more aggressive with its easy money policies as
the rest of the global economy is also functioning in slow
motion. That said it is time to watch the actions out of China
closely as any sign of aggressive easing is likely to result in a
push higher for oil and the broader commodity complex.
Even with the prospects of a China easing oil prices remain
lower and seem to be on a path to end the week lower for the
second week in a row. The geopolitical risk out of the Middle
East has eased while supplies have increased out of OPEC...in
particularly Saudi Arabia in a market where demand is still
relatively lackluster. As discussed below the IEA reported that
OECD inventories are above the five year average for the first
time since May of 2011 supporting the view that oil is well
supplied and bordering on oversupplied at this time. The
fundamentals are bearish and are not likely to result in a
fundamental driven surge in oil prices anytime soon.
The technicals have also broken down over the last several
weeks with WTI starting to look like it may be moving into a
consolidation pattern after falling strongly over the last two
weeks. At the moment WTI looks like it may be moving into a $95
to $100/bbl trading range with little support to push it above
the upper end of the range in the short term. However, the
exposure for a breaching of the lower end of the trading range is
much greater and will be dependent on how the turmoil that is
surfacing in Europe evolves over the next several weeks...in
particular with Greece. As such I still remain cautiously bearish
for the entire oil complex.
Global equities have continued to lose value falling another
0.3% over the last twenty four hours as shown in the EMI Global
Equity Index table below. The year to date gain for the Index has
narrowed further and dropped to 4.9% or the lowest level since
around the second week in January. The Index has now given back
about 79% of its gains for the year with three bourses still in
negative territory for 2012. Germany remains the only equity
bourse that is still showing a double digit gain for the year.
The global equity markets remain a bearish price driver for oil
and the broader commodity complex as it is also a negative
leading indicators for the global economy.
The International Energy Agency released their latest oil market
assessment. Following are the main highlights of this report. The
IEA report is mostly in line with the EIA and OPEC reports also
highlighted in previous newsletters.
Crude markets reversed their upward course in April and by
early May futures prices had fallen $10-12/bbl amid disappointing
economic data for the US and Europe and an apparent easing of
tensions between the international community and Iran. Brent
crude was last trading near a three-month low of $113/bbl, with
WTI at $97/bbl.
Global oil supply increased by 0.6 mb/d to 91.0 mb/d in April,
3.9 mb/d above last year. Higher Iraqi, Nigerian and Libyan
supplies lifted OPEC production by 410 kb/d, to 31.85 mb/d. The
'call on OPEC crude and stock change' is raised by 0.2 mb/d to
30.9 mb/d for 3Q12 and by 0.4 mb/d to 30.7 mb/d for 4Q12, with
the 2012 average now 30.3 mb/d.
Non-OPEC supply increased by 0.1 mb/d to 52.9 mb/d in April as
a seasonal rise in biofuels output offset declining supplies in
the UK and Canada. Despite persistent non-OECD outages in 2012,
production growth in North America should average 0.6 mb/d for
the remainder of the year, lifting non-OPEC supplies by 0.6 mb/d
y-o-y to 53.3 mb/d.
Global oil consumption is set to rise by 0.8 mb/d (0.9%) in
2012, to 90.0 mb/d, with gains in the non-OECD more than
offsetting declining OECD demand. After posting near-zero annual
growth in 4Q11, global demand growth is forecast to gradually
accelerate throughout 2012, culminating in an expansion of 1.2
mb/d by 4Q12.
OECD industry oil inventories increased by 13.5 mb in March,
to 2 649 mb, lifting total stocks above the five-year average for
the first time since May 2011. Moreover, forward demand cover
rose by 0.5 day to 60.3 days, 3.0 days above the five-year
average. Preliminary data indicate a modest 5.1 mb increase in
industry stocks in April.
Global crude throughputs reached a seasonal low of 73.4 mb/d
in April, coinciding with a peak in refinery maintenance. Crude
runs are expected to rise sharply from May onwards, as refiners
complete turnarounds and meet seasonally stronger demand. On a
quarterly basis, global runs are expected to fall from 74.8 mb/d
in 1Q12 to 74.3 mb/d in 2Q12, 150 kb/d and 440 kb/d respectively
above 2011 levels.
I am keeping my view to cautiously bearish after oil broke
down on all fronts last week with a continuation to the downside
to open trading for the week. Oil is now solidly below the
trading range it has been in for the last month or so and well
below several key support areas. WTI is now solidly trading in
double digits with Brent currently holding up a tad better.
I am keeping my view at neutral and keeping my bias also at
neutral with an eye toward the upside. The surplus is still
building in inventory versus both last year and the five year
average and could lead to a premature filling of storage during
the current injection season. However, I now believe that we may
see other producers starting to signal a cut in production. We
may still see lower prices (thus the basis for my bias) but I
think the sellers are losing momentum.
Yesterday's Nat Gas report was bullish but so far the market
has been in the midst of light selling in what I view as a sell
the news trading pattern. The fact that this week's injection
level was significantly below last year and the five year average
has been priced into the market over the last several days. The
market is approaching this new found three week old uptrend very
cautiously and with great patience...as it should. The price
recovery so far has been primarily driven by a small amount of
production cuts but mostly supported by a bump up in demand.
Power related Nat Gas demand has increased about 5 BCF/day
(through April 10th) this year versus last year as a result of
coal to gas switching.
The increased movement of Nat Gas from coal is not an
unlimited movement and is very dependent on the economics of both
of these commodities. Within the current trading range of around
$2.20 to $2.50/mmbtu the economics will continue to favor
maximizing the utilization of Nat Gas for power generation
wherever feasible. As prices continue to rise there will be
limitations as to new switching.
This demand pattern may be enough to carry the market out of
the shoulder season and into the summer cooling season when there
should at least be some increases in demand assuming the summer
temperatures are at least normal. However, when looking at the
underperformance of injections as we head into the summer season
the temperatures are going to have to be very much above
normal... as last summer was an extremely hot summer... for the
underperformance of injections to continue and thus the narrowing
pattern of Nat Gas in inventories to continue.
Currently markets are lower as shown in the following
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
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