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 (CPI) 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 table.
Dominick A. Chirichella
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