Simple math for Oil or why inventories data doesn't work
Promising Chinese data and the dollar rout on Tuesday became short-lived growth factors in oil prices. After a sharp recovery by more than 1%, a pullback followed, returning the market to its starting position. Prices continue to remain sensitive to US production data, but a steady decline in commercial inventories (EIA, API data) seems to have exhausted itself as a positive catalyst for the market.
Since mid-April, oil has steadily declined from US commercial storage, but prices have moved down the slope, ignoring traditionally positive signals. It clearly corresponds to rising US production though. The markets probably referred the inventories drop to seasonal factors, such as increased fuel consumption in the summer months while generally turning to a fairly simple math - a reduction in OPEC production vs. aggregate production growth in the US, Libya and Nigeria. In three months, US firms added 150K barrels in output. while production in Libya has increased from 500K in early April to more than 1M barrels to day. Production in Nigeria has been also remaining unchecked. According to the forecast of EIA, shale production in August will increase by about 100K barrels. Comparing the dynamics of production in the US and OPEC members allowed for unlimited production, the latter contribute significantly to the glut of the market. OPEC's ability to agree with its own participants - Libya and Nigeria looks more realistic than with the US, so the waiting bulls have something to hope for. Other positive factors include news-triggers, such as improving economic situation in the economies of Asia, the main consumers of hydrocarbons and disruptions in supplies that have a short-term effect.
A technical meeting with OPEC, Russia and Libya will be held July 22 in St. Petersburg where Libya, according to some sources, is going to share plans for production or in other words seek for tradeoffs with the cartel. Brent has a good chance to test $ 50 and even go higher.
The US dollar stopped the downward movement after panic on Tuesday, as the president's seat for Trump turned out to be far from comfortable with the opposition of not only Democrats, who skillfully led the information war, but also among the ranks of Republicans. Health care reform is a failure, Trump is severely constrained as a reformer in his movements, so the failure of the mood of some investors who made a bet on reflation was inevitable. The Fed significantly lowered the degree of confidence in the comments about the economy, which became even more logical after the inflation slowdown in June. The growth of mortgage approvals by more than 6% in June, taking into account the growing rates of the Fed, has become an excellent support for the dollar today.
After leaving the US market, in particular the dollar, investors are preparing for a big event in the euro area, where the ECB is preparing to move to a cycle of policy normalization, that is, a transition from stimulus to restraining measures. Some investors consider Draghi to be "obsessed" with inflation targeting, who stubbornly scrutinize only certain details of the economic picture, but his caution may be justified given the rather low prices of oil and CPI lagging behind the target by almost a third. As mentioned in the previous article, Draghi will not be in a hurry to blow off the dust from the levers of monetary restraints, and probably will prefer to throw cold water to investors by mentioning the fragility of inflation.
In the Japanese economy, even the fragile inflation is not the case. It shows signs of life but remains extremely sluggish and the Bank of Japan will probably have to announce the extension of ultra low rates and asset purchases at a meeting on Thursday. In this light, the pairs CADJPY and AUDJPY have more room for growth amid a clear demonstration of the intention to move to tightening the banks of Australia and Canada.
Since mid-April, oil has steadily declined from US commercial storage, but prices have moved down the slope, ignoring traditionally positive signals. It clearly corresponds to rising US production though. The markets probably referred the inventories drop to seasonal factors, such as increased fuel consumption in the summer months while generally turning to a fairly simple math - a reduction in OPEC production vs. aggregate production growth in the US, Libya and Nigeria. In three months, US firms added 150K barrels in output. while production in Libya has increased from 500K in early April to more than 1M barrels to day. Production in Nigeria has been also remaining unchecked. According to the forecast of EIA, shale production in August will increase by about 100K barrels. Comparing the dynamics of production in the US and OPEC members allowed for unlimited production, the latter contribute significantly to the glut of the market. OPEC's ability to agree with its own participants - Libya and Nigeria looks more realistic than with the US, so the waiting bulls have something to hope for. Other positive factors include news-triggers, such as improving economic situation in the economies of Asia, the main consumers of hydrocarbons and disruptions in supplies that have a short-term effect.
A technical meeting with OPEC, Russia and Libya will be held July 22 in St. Petersburg where Libya, according to some sources, is going to share plans for production or in other words seek for tradeoffs with the cartel. Brent has a good chance to test $ 50 and even go higher.
The US dollar stopped the downward movement after panic on Tuesday, as the president's seat for Trump turned out to be far from comfortable with the opposition of not only Democrats, who skillfully led the information war, but also among the ranks of Republicans. Health care reform is a failure, Trump is severely constrained as a reformer in his movements, so the failure of the mood of some investors who made a bet on reflation was inevitable. The Fed significantly lowered the degree of confidence in the comments about the economy, which became even more logical after the inflation slowdown in June. The growth of mortgage approvals by more than 6% in June, taking into account the growing rates of the Fed, has become an excellent support for the dollar today.
After leaving the US market, in particular the dollar, investors are preparing for a big event in the euro area, where the ECB is preparing to move to a cycle of policy normalization, that is, a transition from stimulus to restraining measures. Some investors consider Draghi to be "obsessed" with inflation targeting, who stubbornly scrutinize only certain details of the economic picture, but his caution may be justified given the rather low prices of oil and CPI lagging behind the target by almost a third. As mentioned in the previous article, Draghi will not be in a hurry to blow off the dust from the levers of monetary restraints, and probably will prefer to throw cold water to investors by mentioning the fragility of inflation.
In the Japanese economy, even the fragile inflation is not the case. It shows signs of life but remains extremely sluggish and the Bank of Japan will probably have to announce the extension of ultra low rates and asset purchases at a meeting on Thursday. In this light, the pairs CADJPY and AUDJPY have more room for growth amid a clear demonstration of the intention to move to tightening the banks of Australia and Canada.
This analysis is provided as general market commentary and does not constitute investment advice. Past performance is not indicative of future results