Oil remains solidly in my predicted trading range even after a big miss on China GDP overnight. Oil is off modestly in overnight trading after data released last night showed China's economy is growing at the slowest rate in about three years while Saudi Arabia's Minister said that the Kingdom is producing 10 million barrels per and he sees no shortage of oil anyplace in the world. Although oil has rebounded over the last two sessions (as of this writing) the spot WTI contract is still down by about $0.15/bbl. Oil is caught is a market that is being driven to the upside by the perception that there may be a possible supply disruption due to the evolving geopolitical issues surrounding Iran's nuclear program. On the other end of the equation oil is getting a downside push from the growing view that the global economy is slowing (as we saw last night in China) and thus oil demand growth is headed for a slowing period. Barring a big failure from the meeting tomorrow between Iran and the West this push and pull view of the oil complex is likely to stay in place for the next several months.
Let's start the conversation with the supply side of the equation. As Saudi Minister Naimi indicated last night there is no shortage of oil anywhere in the world. Saudi Arabia is producing 10 million barrels per day and more than offsetting any of the smaller disruption from places like Syria, Yemen and the Sudan as well as filling the logistics gap of replacing some Iranian oil production in Europe. The whole supply issues is all about what happens if sanctions and diplomacy fails. The west is putting a lot of hope that the harsher sanctions imposed directly on Iran's oil operations will be enough of an economic motivation for Iran to come to the negotiating table with a different attitude than in previous negotiations. We do not have to wait much longer to find out how the negotiations go as they will take place tomorrow in Istanbul. Yesterday Iranian TV indicated that Iran was coming to the meetings with new proposals that will relieve the worries of the west (no further details were released).
I still think the outcome of the meeting will be one that both sides will say progress has been made and another round of meetings will be scheduled. I believe the West will offer to remove the last round of sanctions embargoing the purchase of Iranian crude oil if Iran reduces and confines its nuclear enrichment program to that what is needed for power generation and medical research only. If that turns out to be the case then I would expect the risk premium to slowly start to recede from the price of oil over the next several weeks especially with the demand side of the equation looking less robust today than just a few months ago.
On the demand side of the equation one has to primarily focus on China and the rest of the emerging market countries as that is basically where all of the oil demand growth has come from for the last four years or so. The US which is still the largest consumer of oil in the world has seen its oil consumption pattern remain in a downtrend since 2007. As such whether or not the US economy is growing a little slower or faster it is not going to make much of a major difference in the overall supply and demand balance of the oil industry., The same holds for Europe. The main player in the area of oil demand growth is China and what happens in China tends to spread around the world for oil and most all traditional commodity markets. Last night's snapshot of where China's economy is currently at was very disappointing for the oil bulls in my opinion.
The data out of China showed that GDP slowed even more than the consensus was calling for and well below the whisper number or rumor circulating around the market during Thursday's trading session. GDP came in at 8.1% versus projections for a 8.3 to 8.4% growth rate and a whisper number of around 9%. However, a pickup in industrial production and retail sales along with a big jump in new Yuan loans (a stimulus of sorts) offset some of the negativity associated with the much lower than expected GDP figure. Until proven otherwise China's economy is in a slowdown and how long and how deep it goes is still an unanswered question. A variable in the mix is the fact that the latest inflation data out of China came in higher than expected which may limit the Chinese governments aggressiveness in stimulating their economy and thus prolonging the time when the slowdown does actually bottom out. For the moment I view what is going on in China as a signal that oil demand growth is going to slow and likely come in below all of the projections made to date by the EIA, IEA and OPEC. I view the China data as a big negative or bearish signal for the oil complex.
The global equity markets continued to recover over the last twenty four hours as shown in the EMI Global Equity Index table below. The Index gained 1.8% over the last twenty four hours narrowing the weekly loss to just 0.5%. The year to date gain is now at 9.5% with all bourses still in positive territory for the year. The market sentiment is still in a mode of wanting to push higher suggesting that the downside move in global equities and the subsequent recovery has to still be categorized as a correction in a broader uptrend. For this week equities have been a bullish signal for the oil complex.
I am keeping my view at neutral for oil as WTI remains within my predicted trading range of $102 to $107/bbl. I am a bit surprised that the oil complex is trading like it is... somewhat discounting the negative data out of the largest oil demand growth engine in the world...China. That said Geopolitics will remain the main price driver leading up the Iran/West meetings on April 14th but until I get more clarity as to how the meeting is likely to turn out I am more comfortable staying on the sidelines today.
I am still keeping my view at and bias at bearish. My overall view remains biased to the bearish side. The surplus is still building in inventory versus both last year and the five year average is going to lead to a premature filling of storage during the current injection season. As such for the short to medium term I doubt Nat Gas is going to reverse the downtrend it has been in for an extended period of time. We may certainly see times when short covering rallies take hold but I do not expect a sustained trend change.
The most interesting outcome in the Nat Gas market over the last two days has been the spot futures price finally broke the $2/mmbtu level as predicted and is now trading with a $1 handle even after a slightly bullish inventory report this morning (see below for more details). The next support level is around the $1.95/mmbtu level. Nat Gas remains in a long term downtrend and nothing has changed to suggest this trend is on the cusp of changing. In my view the only action that will make the trend change quickly is a significant cut in production.
Another bearish layer hit the market today when the EIA reported an injection level that was a bit below the expectations but still bearish overall. The immediate reaction was to buy the number but surprisingly the instant short covering rally lasted minutes with Nat Gas back to trading a tad below the $2/mmbtu level as of this writing. I would not categorize the way the futures market is trading at this point in time as anything other than bearish in nature and not yet the bottoming of the market. Irrespective as to where Nat Gas futures settle today we will still be in a long term downtrend with lower prices still likely during the shoulder season.
Today's EIA report was bearish from every angle but not versus the market consensus estimate. It was the fifth injection of the season but this one was more normal for this time of the injection season. The EIA injection was below the consensus (25 BCF) about the same as last year's injection but less than the injection for the five year average for the same week. The net injection of 8 BCF is less than my model forecast (25 BCF) this week and less than most of the consensus estimates. The inventory surplus widened versus last year and but narrowed versus the more normal five year average also. The current inventory level is now 934 BCF above the five year average.
Currently markets are lower as shown in the table below.
Dominick A. Chirichella
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