The downside correction in oil prices continued with increased momentum on Thursday as market participants did not react much to the latest positive Chinese data as overall concerns about global oil consumption growth as well as the potential end to the stimulus program (QE3) in the US brought out the sellers. In addition the weekly inventory snapshot was biased to the bearish side as I discussed in yesterday's newsletter. The market have been in the midst of a downside correction that has now been in place for the last five sessions.
Overnight the markets did place more focus on China as better than expected Chinese industrial data hit the media airwaves. An energy sensitive data point… China's factory output increased by 9.7 percent in July on a year over year basis and about 0.8 percent above the market consensus. Offsetting the industrial output a tad was retail sales coming in at 15.2 percent for July or about 0.3 percent below the market consensus.
Overall the Chinese data has pushed the oil complex into a bit of a short covering rally heading into the last trading day of the week and after five down days in a row.
Following is a link to an article I just published on the CME on the Brent/WTI spread:
Today the IEA released their latest monthly oil market assessment. The IEA reduced their projection for oil demand growth marginally in 2014 while leaving 2013 unchanged compared to last month's forecast. Following are the main highlights:
- WTI futures hit 16-month highs in July, narrowing the gap with Brent, amid surging US refining runs and crude draws. The benchmark gained $8.90/bbl m-o-m, to $104.70/bbl. Brent rose $4.09/bbl to $107.43/bbl, a four-month high, on supply outages in Libya and Iraq. WTI was last trading around $103.50/bbl and Brent at $106.70/bbl.
- Global oil demand growth is expected to accelerate in 2014 to 1.1 mb/d, compared with 0.9 mb/d in 2013. The forecast of demand growth for 2014 has been trimmed by 0.1 mb/d on reduced GDP expectations from the IMF, while that for 2013 is largely unchanged.
- Global supply is estimated to have increased by 575 kb/d m-o-m in July, to 91.85 mb/d, led by higher non-OPEC production. Strong growth in North America is expected to lift 2H13 total non-OPEC supply by an average 1.4 mb/d y-o-y, to reach 55.4 mb/d in 4Q13.
- OPEC crude oil supplies edged down by 165 kb/d m-o-m in July, to 30.41 mb/d, on supply disruptions in Libya and Iraq and despite higher Saudi output. The 'call on OPEC crude and stock change' for 3Q13 was revised upwards by 200 kb/d, to 30 mb/d, on higher demand projections for the quarter.
- Global refinery crude demand surged by 3.1 mb/d in June, its highest monthly increase on record, and likely rose further in July, ahead of autumn maintenance. At 77.2 mb/d, June runs were almost 2.0 mb/d above year-earlier levels. Global runs were pegged at 74.8 mb/d for 2Q13, rising to 77.3 mb/d in 3Q13.
- OECD industry inventories built seasonally by 11.9 mb in June, to 2 663 mb. Steep gains of 33.6 mb in product inventories led the increase, offsetting large crude draws. Refined product stocks covered 30.5 days of forward demand at end-June, up 0.8 day on the month.
OPEC also just released their monthly oil market assessment. OPEC raised their projection for oil demand growth in 2014 marginally. Following are some of the main highlights from this report.
- World economic growth for 2013 has been revised down to 2.9% from 3.0%, mainly due to lower GDP growth estimates for the US in the first quarter, as well as the slowdown in China's economy. The 2014 global growth forecast remains unchanged at 3.5%.
- World oil demand growth in 2013 was revised marginally higher to stand at 0.8 mb/d. The revision is based on actual and preliminary data for the first half of the year, due to adjustments to all of the OECD regions, as well as some in the non-OECD, especially Latin America and Other Asia. The forecast for global oil demand growth in 2014 remains unchanged at 1.04 mb/d. Non-OECD countries are projected to increase by 1.2 mb/d, while OECD is expected to see lower contraction at 0.2 mb/d compared to the current year.
- Non-OPEC supply is expected to rise by 1.0 mb/d in 2013, following a minor upward revision, mainly due to historical revisions, as well as higher-than-expected US output. In 2014, non-OPEC oil supply is forecast to grow by 1.1 mb/d, supported by projected increases in the US, Canada, Brazil, the Sudans, and Kazakhstan. OPEC NGLs and nonconventional oils are projected to increase by 0.2 mb/d in 2013 and 0.1 mb/d in 2014. In July, total OPEC crude oil output averaged 30.31 mb/d, according to secondary sources, representing a drop of 0.10 mb/d from the previous month.
- The demand for OPEC crude in 2013 is forecast to average 29.9 mb/d, almost unchanged from the previous report and 0.4 mb/d lower than in the year before. In 2014, demand for OPEC crude has experienced a slight change since the previous report to stand at 29.7 mb/d. This represents a decline of 0.3 mb/d compared to the year before.
- Total OECD commercial oil stocks rose by 13 mb in June for the fourth consecutive month, but remained slightly below the five-year average. Crude stocks were in line with the five-year average, while product inventories showed a deficit of 6.4 mb with the seasonal average. In term of forward cover, OECD commercial stocks stood at 59.1 days, 1.2 days more than the five-year average. Preliminary data for July showed US total commercial oil stocks fell by 8.1 mb, reversing the build of the last fourth months, but still representing a surplus of 29.7 mb with the five-year average. Crude and products showed a surplus of 21.9 mb and 7.8 mb, respectively.
NOAA issued its updated Atlantic hurricane season outlook today saying the season is shaping up to be above normal with the possibility that it could be very active. The season has already produced four named storms, with the peak of the season – mid-August through October – yet to come.
The conditions in place now are similar to those that have produced many active Atlantic hurricane seasons since 1995, and include above-average Atlantic sea surface temperatures and a stronger rainy season in West Africa, which produces wind patterns that help turn storm systems there into tropical storms and hurricanes.
The updated outlook calls for a 70 percent chance of an above-normal season. Across the Atlantic Basin for the entire season – June 1 to November 30 – NOAA's updated seasonal outlook (which includes the activity to date of tropical storms Andrea, Barry, Chantal, and Dorian) projects a 70 percent chance for each of the following ranges:
- 13 to 19 named storms (top winds of 39 mph or higher), including
- 6 to 9 hurricanes (top winds of 74 mph or higher), of which
- 3 to 5 could be major hurricanes (Category 3, 4 or 5; winds of at least 111 mph)
These ranges are above the 30-year seasonal averages of 12 named storms, six hurricanes and three major hurricanes.
I am maintaining my Nat Gas view and bias at cautiously bearish on a less supportive short term temperature forecast. The fundamental picture has shifted as the temperatures across the US do not appear to be moving back to warmer than normal weather anytime soon.
I am maintaining my view at neutral and adjusting my bias to cautiously bearish for the short term as the downside correction seems to be gaining momentum once again. The strong destocking pattern of crude oil in the US Midwest is not acting as a major supporting catalyst at the moment.
Markets are mostly higher heading into the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
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