There is simply no market leadership anyplace in the world. In past downturns the markets has looked to China as a bright spot in an otherwise slow growth economic world. Even China is continuing to see its meteoric economy slowing. The latest PMI data out of China released overnight declined to 50.4 in May compared to 53.3 in April. It is now approaching the contraction level (less than 50) in the energy intensive manufacturing sector. With China's number one export market...Europe...on the cusp of a double dip recession the latest downturn in manufacturing should not be a surprise.
In Europe the economic data was not much better with unemployment hitting a record 11% with Spain in the lead. This is the highest unemployment level in the EU since the EU data series started back in 1995. The UK PMI moved into contraction mode coming in at 45.9 for May versus 50.2 for April. The combined EU PMI moved deeper into contraction dropping to 45.1 for May from 45.9 in April. This is the weakest EU PMI reading since the middle of 2009.
Yesterday's macroeconomic data out of the US were all disappointing starting with the latest reading of Q1 GDP dropping to 1.9% from the previous reading of 2.2%. All of the pre-employment data points came in below estimates possibly setting the stage for the third month in a row of disappointing nonfarm payroll data to be released at 8:30 am EST today. The plethora of negative data overnight has resulted in more selling in the risk asset markets with cash continuing to flow to the US dollar and US government bonds even with interest rates at record low levels for the 10 year bond of around 1.5%.
Brent is now trading below the $100/bbl level while WTI is now below the $85/bbl level. This is the lowest level for oil prices since October of 2011. The only bright spot for the global economy is the fact that oil prices have declined strongly over the last several months which should eventually result in more consumer non-discretionary spending (possibly) at some point down the road. Since peaking in March Brent has shed about $25/bbl while WTI has declined by about $24/bbl. Basis global oil consumption of about 88.9 million barrels per day (basis latest EIA STEO report) the world is spending about $2.2 billion dollars per day less today to meets its oil need than it was just a few months ago in March. Yes that is a positive for the global economy but it is not clear as to whether the consumer will simply save and pay off debt with the energy cost savings or spend the extra dollars.
The phrase used around Wall Street of Sell in May and go away has been in play for the third year in a row. Just about every risk asset market declined strongly during the month of May and June does not look like it is starting any differently. The following two charts show the seasonal relationship for US S&P futures and Brent crude oil prices. The first chart shows the directional movement of the S&P futures market following last year and 2010 very closely and looking like it may not be until mid- summer before a bottom is finally formed if this year's seasonal movements are in sync with the past. The following chart of Brent is not much different from the chart of the S&P as it looks like it has move to go to the downside before bottoming. Seasonal analysis does not always work but the two charts are providing some directional guidance and for now are very much in sync with the previous two year's movements.
Equity markets are under pressure as shown in the EMI Global Equity Index table below. The EMI Index is at its lowest level of the year with a year to date loss of 1.9%. Back in March the Index was showing a gain of 15.2%. The market sentiment has turned strongly bearish as the EMI index is approaching the bear market threshold of a decline of 20%. So far the decline from the high in March is at 17.1%. Needless to say global equity markets are trading with a no confidence vote for the global economy. Five of the ten bourses in the Index are now in negative territory for the year with China holding the top spot in the Index as many players are expecting a more aggressive stimulus approach by the Chinese government sooner than later. I am not sure that the stimulus this time is going to be very aggressive.
Adding fuel to the oil fire and supportive for the consuming nations Saudi Arabian crude oil production is at the highest level in about 23 years according to the latest Bloomberg survey. OPEC production in May was at the highest level since 2008. In mid-May the Saudi Minister said he wanted to see Brent crude oil drop below $100/bbl ...today that has happened. As mentioned above this is a bright spot for the global economy and a big negative for Iran (also other crude oil producing nations). Falling oil prices are adding pressure to Iran along with the loss of crude oil sales due to the EU embargo. I believe it is impacting Iran (even though they have said otherwise) as it is the reason they are still at the negotiating table with the West.
The next meeting is scheduled for Moscow in mid-June and in spite of the outcome of the previous meeting in Baghdad I believe Iran is looking for a deal of some sorts that allows them to still enrich and save face but also results in a lifting of the sanctions. If oil prices continue to decline back to 2010 levels Iran is going to struggle even more than it already has from an economic viewpoint. The next meeting will be pivotal and I think progress will be made.
Wednesday's EIA inventory report was mixed to biased to the bearish side as it showed another strong increase in total stocks, a build in crude oil above the expectations a modest draw in gasoline while distillate fuel declined more than expected. Total implied demand decreased with gasoline demand increasing. Refinery utilization rates increased on the week to 89.1% of capacity an increase of 1.0% in refinery run rates. The data is summarized in the following table along with a comparison to last year and the five year average for the same week.
Total commercial stocks of crude oil and refined products increased by 5.7 million barrels after increasing modestly the week before. The year over year surplus narrowed to 19.2 million barrels while the surplus versus the five year average for the same week also narrowed to 38.4 million barrels. By all measurements total oil supply in the US is still balanced to comfortable irrespective of the evolving geopolitical risk at the moment.
Crude oil inventories increased (by 2.2 million barrels) versus an expectation for a smaller build. Crude oil inventories increased for the tenth week in a row are now well above the levels they were at during the height of the recession as well as being at the highest level since 1990. With an increase in stocks this week the crude oil inventory status versus last year is now showing a surplus of around 10.9 million barrels while the surplus versus the five year average for the same week came in around 33.9 million barrels. PADD 2 crude oil inventories decreased by about 0.15 million barrels while Cushing, Ok crude oil inventories increased marginally on the week.
Crude oil inventories in the mid-west region of the US have been building of late with stocks in Cushing now at the highest level on record. The small decrease in inventories this week is neutral for the Brent/WTI spread. The spread has been narrowing the last week on a combination of the start of Seaway, a faltering European economy and an easing of the geopolitical risk.
Distillate stocks decreased versus an expectation for a small seasonal build. Heating oil/diesel stocks decreased by 1.7 million barrels. The year over year deficit came in around 22.3 million barrels while the five year average remained in a deficit of about 16.5 million barrels.
Gasoline inventories declined modestly and greater than the expectations as a result of the industry's transition to summer grade gasoline. Total gasoline stocks decreased by about 0.8 million barrels on the week versus an expectation for a draw of about 0.2 million barrels. The deficit versus last year came in at 12.1 million barrels while the deficit versus the five year average for the same week was about 34.5 million barrels.
The following table details the week to week changes for each of the major oil commodities at every level of the supply chain. As shown I have presented a mixed categorization but one that is biased to the bearish side on the week as both gasoline and distillate fuel declined on the week.
I am keeping my view at cautiously bearish after oil broke down on all fronts once again both WTI and Brent are trading at levels not seen since the fall of 2011. Oil is still solidly below the trading range it was in just a few weeks ago and well below several key support areas yet again. WTI is still solidly trading in double digits with Brent now below the $100/bbl mark. The trend remains downward but oversold.
I am keeping my view at neutral and keeping my bias at neutral with an eye toward the upside now that Nat Gas has moved back to much more representative levels that are in sync with current fundamentals. The surplus is still narrowing in inventory versus both last year and the five year average but could lead to a premature filling of storage during the current injection season.
Currently markets are lower as shown in the following table. The last shot at a short covering rally today could come if the US nonfarm payroll data is better than forecast. Forecast is for 150,000 new jobs. Needless to say a downside miss will result in further risk off selling.
Dominick A. Chirichella
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