US oil inventories preview: EIA data to confirm the biggest draw this year?

Commodities

Crude oil has been able to power through the $40 handle today ahead of the US EIA crude oil inventories data, following a forecast-beating draw revealed by the American Petroleum Institute.

The latest API report estimated an 8.156 million barrel draw from US oil stocks last week, smashing forecasts for a draw of 710,000 barrels.

If accurate, it will be the largest draw of 2020 so far. Gasoline stocks also fell more than expected, with a draw of 2.459 million barrels last week, down from the previous week’s 3.856 million barrel drop, but still almost one million barrels higher than analysts had predicted.

US oil inventories report boosts oil after indecisive session

West Texas Intermediate crude oil had tumbled through the $40 handle to close at $38 per barrel on June 24th. Since then the benchmark has recovered, with yesterday’s API data helping oil gain around $0.60, or 1.6%. Yesterday’s indecisive trading saw prices briefly rise above $40 before retreating to close virtually flat at $39.60.

Brent oil has risen $0.60, or 1.5%, today to trade above $42 for the first time in five days.

The huge draw was some welcome news for oil bulls, after the commodity had been stuck trading sideways in line with other markets as investors struggled to weigh up improving economic data and rising numbers of coronavirus infections.

The API data has given crude oil fresh impetus on a day that could otherwise have seen more range bound trading.

On a positive note, the Chinese Caixin Manufacturing PMI beat expectations, rising from a revised 50.7 to hit 51.2 in June, against forecasts of 50.5.

But on the other hand, the US has recorded its biggest single day spike in cases since the pandemic started after reporting 47,000 new Covid-19 infections, raising fears that parts of the economy may have to be shuttered again to prevent further spread, which would hamper the recovery and dent the outlook for the oil demand.

EIA Crude Inventories Preview: Crude oil back below $41 after mixed API data

Commodities

Crude oil rose to test $41 yesterday as markets bet on a stronger-than-expected recovery in demand, with the actions of OPEC+ continuing to provide support. It was the highest since March 6th, although crude has today opened below $40.50 and briefly dipped below the $40 handle. Will today’s EIA crude oil inventories data given WTI some direction?

Data yesterday from the American Petroleum Institute indicated a 1.7 million barrel increase in US oil stocks. Analysts had forecast a rise of 300,000 barrels. Even though the data showed a higher-than-expected build, the injection was still the lowest for three weeks. The report also showed gasoline inventories fell, pointing to increased demand for fuel.

Yesterday’s run of PMIs from across the globe has helped reignite hopes of a quick economic rebound:

  • Australia’s services and composite indices unexpectedly leapt back into growth territory with readings above 50, while the manufacturing index printed just 0.2 points shy of the neutral level.
  • The French manufacturing, services, and composite indexes all blew past forecasts to return to growth.
  • PMIs for Germany and the Eurozone, while continuing to indicate a decline in output, rose further-than-expected to signal a slower pace of contraction than forecast.
  • The UK manufacturing sector grew fractionally in June, after the index recovered much further than analysts had predicted. Services and the composite index also bettered forecasts, although they still pointed to a decline.
  • US manufacturing shrank marginally in June, although the reading still beat expectations.

The readings helped improve the demand outlook. This, combined with support from a move towards greater compliance with production cuts from OPEC and its allies, helped crude oil hit three month highs yesterday, before profit-taking forced a retreat back towards $40.

Also supporting oil this week are revised average price forecasts for 2020 from Bank of America Global Research. Its average price forecast for WTI crude oil is now $39.70, an increase of nearly $8 per barrel.

EIA crude oil inventories preview: Can we trust the forecasts?

Commodities

Yesterday’s API oil inventories report showed a massive build, even though a draw had been expected. Forecasts for today’s US EIA crude oil inventories also predict a drop – how accurate are these predictions?

Crude oil, Brent oil drop after API data shows huge build

Yesterday’s crude oil stock change report from the American Petroleum Institute was expected to show that inventories fell by 1.7 million barrels in the week ending June 5th. Instead, stocks rose nearly 8.5 million barrels.

Oil fell further from the three-month highs hit on Monday on the back of the data. Today crude oil is currently down -$0.38 to trade around $38.12, while Brent oil is trending at $40.46 after falling -$0.29. This is partly due to the API data, but also because of expectations OPEC will not extend the record level of production cuts beyond July.

Candlestick price charts of spot crude oil and spot Brent oil

Will EIA data confirm huge stockpile build?

The Energy Information Administration releases its official crude oil inventories report later today. Forecasts were for a draw of over two million barrels, although in light of the API data this seems unlikely.

In fact, over the past five weeks forecasts for EIA data have been significantly wrong. On average, the forecast has been out by around 5 million barrels. In the past four weeks, forecasters have got the direction of inventory stocks wrong, predicting a build when in fact stocks fell, or vice versa.

Table: EIA crude oil inventories forecasts vs actual

Release Date

Actual

Forecast

Difference

Jun 03, 2020

-2.077M 3.038M

5.115M

May 28, 2020

7.928M -1.944M

9.872M

May 20, 2020

-4.983M 1.151M

6.134M

May 13, 2020

-0.745M 4.147M

4.892M

May 06, 2020

4.590M

7.759M

3.169M

 

Meanwhile, for the past three weeks, the API data and the EIA crude oil inventories report have both shown stockpiles moving in the same direction.

For the week commencing May 25th, the API data showed a build of 8.7 million barrels – under a million barrels above the EIA print.

For the week beginning May 18th, the API numbers were just 183,000 barrels below the EIA’s reported draw of -4.983 million.

OPEC meeting weighs on crude oil ahead of US EIA inventories data

Commodities

Crude oil is on soft form today as markets await news on the next OPEC meeting and today’s US crude oil storage data.

WTI and Brent futures contracts for August have crept below opening levels ahead of the EIA data. Earlier in the session, crude oil had spiked above $38, while Brent had broken above $40 per barrel – both of which were the highest levels since early March.

Oil weak as news of OPEC meeting disappoints

Both crude oil and Brent oil have been on volatile form today as markets struggle to decide what seems to be the most likely outcome of the upcoming OPEC meeting.

Markets had been encouraged earlier in the week by indications that the meeting would be moved forwards to tomorrow (Thursday, June 4th), suggesting that members were keen to agree a deal to keep supporting prices.

There had been rumours that the current record level of production cuts, which at 9.7 million barrels per day equates to nearly 10% of global demand, would be extended all the way to the end of the year.

Compliance with the cuts has been running at around 75%, and the latest reports indicate that this is causing tensions amongst members of the cartel. Reuters has reported today that the OPEC+ group, which comprises the cartel and its allies, is likely to extend the cuts by one month.

This has not impressed markets, with traders having hoped for several more months of the higher production curbs.

Can EIA crude oil inventories data support prices ahead of OPEC meeting?

Data from the American Petroleum Institute released yesterday showed a surprise drawdown of half a million barrels. This was against market expectations of a 3 million barrel build.

Today’s official EIA data is also expected to show a build of 3 million barrels, after stocks rose by nearly 8 million barrels the previous week. A surprise draw in line with the API figures could lend some support to crude oil prices, although the issue of OPEC will remain the key driver of price action.

OPEC meeting preview: record production cut to be extended?

Commodities

Crude oil and Brent oil have continued to push higher this week on hopes that the upcoming OPEC meeting will see the cartel and its allies agree to extend production cuts.

Officials from major oil producers were originally scheduled to hold their next (online) meeting on June 9th, but current OPEC president Algeria has proposed moving the meeting forward to June 4th – this Thursday.

Oil traders have taken this as a sign that the cartel and its allies, a grouping known as OPEC+, are eager to act as quickly as possible to keep oil markets stable.

Crude oil firms ahead of OPEC meeting

Crude oil has gained over $0.80, or 2.3%, while Brent oil is $0.90, or 2.4%, higher today.

Candlestick chart of crude oil prices and Brent oil prices comparison

OPEC’s current output cut is for nearly 10 million barrels per day. It’s the highest level of production cuts in the cartel’s history and equates to around 10% of global demand.

The cut was agreed in the wake of the collapse in oil prices during March. Saudi Arabia, frustrated that OPEC ally Russia was refusing to commit to further cuts to help counteract the shock to demand caused by the coronavirus pandemic, abandoned existing curbs and slashed prices on its own oil exports.

The Kingdom and Russia soon returned to the negotiating table and agreed to the 9.7 million barrels per day cut in May and June, with the production cut reducing to 7.7 million barrels per day from July until December.

But OPEC officials are now in talks to continue with the elevated level of cuts, potentially until the start of September. While some reports suggest that the cuts could remain in place until the end of the year, such a proposal would likely meet with strong resistance from Russia.

Are crude oil and Brent oil heading higher after OPEC meeting?

While oil has edged higher this week on tentative hopes for an agreement on extending the cut, OPEC meetings always carry a risk of disappointment. Markets are showing restraint ahead of the gathering, which is still yet to be confirmed for this week.

While it seems that OPEC producers want to keep the current level of cuts in place, Russian participation remains a key sticking point. It seems the Russians are onboard with something, but there is a risk the final agreement falls short of market expectations.

Get more insight ahead of the cartel gathering with our exclusive OPEC meeting special on XRay  – set a reminder now.

EIA Crude Oil Preview, May 28th: Data to confirm a huge build?

Commodities

WTI crude oil and Brent oil are cautiously higher ahead of today’s US oil inventories report.

The official weekly report from the Energy Information Administration is expected to show a drop of nearly 2 million barrels.

Crude oil dives as API data shows surprise build

But data yesterday from the American Petroleum Institute stunned markets with a surprise 8.1 million barrel build. Like the upcoming EIA data, forecasts had been for a draw of 2 million barrels.

WTI crude oil futures contracts for delivery in August have been range bound since the middle of May, with $32 providing support and resistance at $35 keeping a ceiling on rallies.

Chart: WTI crude oil futures contracts, August delivery

Candlestick graph for WTI crude oil August futures contracts, May 28th 2020

Traders have struggled to find direction: on the one hand, the reopening of global economies will help stimulate demand, but on the other, the world remains awash with excess supply.

Sentiment had already taken a hit yesterday even before the API data, as reports cast doubt over Russia’s commitment to OPEC+ production cuts.

Tensions between the US and China over a new security law for Hong Kong is also weighing on risk-appetite, although so far today oil has continued to find bid.

The API data saw crude oil prices fall over $2 per barrel, while Brent was off over $1.50. If the EIA data confirms that inventories rose again last week, today’s gains could quickly turn to losses.

Chart: Brent oil futures contracts, August delivery

Candlestick price chart for Brent oil August futures contracts

WTI rallies after EIA crude oil inventories data shows unexpected draw

Commodities

Crude oil rallied and held gains after a big draw on US crude oil inventories. Crude stockpiles 5m barrels in the week to May 15th, Energy Information Administration said on Wednesday, against an expected build of 1.2m barrels. Gasoline stocks rose 2.8 million barrels vs an expected 2.1m drop. Distillate stockpiles were up by 3.8 million barrels, which was more than expected.

It comes after the EIA predicted a record fall for US production next month. Production in the top 7 shale basins is forecast to fall to 7.822 million bpd in June, down from 8.019 million bpd this month.

The fears are two-fold: one that as prices rise the shale supply gets switched back on, leading to a glut again; and two that the economic reality is worse than the market sentiment implies: demand is not coming back. The gasoline inventories are a warning to traders. Nevertheless the upwards thrust continues for WTI with momentum still apparently with the bulls.

Having cleared the 50-day SMA the rally has continued to the neckline of the V-shaped bottom and now bulls will look to close the Mar 6th-9th gap. The CCI is warning of a possible reversal on the cards with the divergence between the 20-day oscillator and the price action (pink lines) with lower highs made on the CCI. MACD still looks to be with a positive trend. The 200-day SMA is above but this is slightly disturbed by the negative pricing of the May contract which occurred after we had rolled to the next month.

The Spot (continuous contract) however shows a similar pattern as the 200-day line is approached at the topside of the ascending wedge.

WTI Crude Oil Futures (Aug 2020) price chart:

WTI Crude Oil Spot price chart:

US crude oil inventories to increase again after last week’s draw?

Commodities

Today’s incoming US crude oil inventories data is expected to show a build of 1.1 million barrels.

However, last week’s report revealed a surprise draw of over 700,00 barrels, and yesterday’s data from the American Petroleum Institute showed a drop of 4.8 million barrels. Analysts had forecast a 7.6 million build.

If today’s official figures from the Energy Information Administration are in the same ballpark as the API’s it would represent the biggest decline in stockpiles this year. So far in 2020 the two sets of reports have largely printed in line with each other, although historically there can be large discrepancies.

Futures on West Texas Intermediate crude oil for delivery in August continue to trade around the nine-and-a-half-week high struck on Monday. Prices are up around $0.80, or 2.3%.

Brent oil futures for July are trading $0.90, or 2.6%, higher.

Concerns over the vast demand destruction caused by the Covid-19 pandemic continue to weigh on oil markets; gains for WTI could be undone if the EIA crude oil inventories data does show another build.

Risk offered into the weekend

Commodities
Equities
Forex
Indices

A number of factors have conspired to create a more risk-off tone to the end the trading week than we saw at the start of the European session.

Although European indices are just about holding the line, US futures are indicated lower and we may see the S&P 500 retest the lows under the 50% retracement level at 2790. The Dow is indicated -200pts.

The FTSE 100 has retreated sharply from the morning highs of the day and may well stutter into the close should Wall Street drag sentiment down. The DAX is also well off the highs though still positive, the CAC is already weaker, and the Euro Stoxx 50 is flat. US indices are already set for their worst week since the middle of March. Key test at yesterday’s lows at 2,766 for SPX.

In FX, the Japanese yen was the strongest and kiwi was the weakest. Sterling sank to its weakest since late March. Gold has broken out above the Apr 24th peak and now has the $1747 region its sights. A breakout above $1750 could see the next leg higher to $1800.

US retail sales were even worse than forecast in April, sliding 16.4% vs 12% expected. Core retail sales fell 17.2% vs 8.6% expected. Trying to read too much into individual data points in the current environment is exceptionally tough, but the optics from these figures are hardly reassuring.

US-China relations sour by the hour, with the White House moving to block semi-conductor shipments to Huawei. Reports suggest China is looking at retaliation with measures against US companies like Apple, Qualcomm and Cisco. I think we can assume a ratcheting up of pressure on China by the Trump administration in the coming weeks.

UK-EU relations are also looking very risk-off. GBP is now in full RoRo mode and cable made fresh two-month lows as it breached the April 6th support at 1.2160 to test 1.2150. It looks like real stalemate.

The UK is refusing to countenance the EU’s level playing field demands. Britain also said it would refuse any offer to extend the transition period. Both Frost and Barnier sounded downbeat on the prospects of a deal. Barnier said the positions are extremely divergent, Frost said very little progress has been made.

A lot to do to avoid the dreaded no-deal – downside risks for GBP clearly evident. The pound is already beaten up pretty badly due to the wider macro outlook as a risk-on currency these days, and the Brexit risk has reared its head again to impart more pressure.

Advisory note – Trump as ever is the wildcard and we have Rose Garden update on a vaccine from the president at some point today.

Are gold prices about to stage a second wave rally?

Commodities

Gold prices have been very well supported due to a broad flight to safety amid the Covid-19 pandemic, whilst a slump in real yields has made the metal less unattractive despite the lack of inflation.

Although gold swung lower as risk assets were ditched in February and the first half of March, this was prompted by a scramble for cash at all costs due in part to a dollar liquidity squeeze that has since eased considerably.

As risk assets have rallied off the March lows, gold too has made substantial gains and is on the brink of notching fresh multi-year highs. Bitcoin has traded in a similar fashion.

Whilst sentiment and relative dollar values exert short-term pressure, there is one key thing that drives gold prices: real yields. Central banks have been pushing down on yields aggressively with lower target rates and massively increasing their bond-buying programmes.

The Fed’s commitment to unlimited QE and the subsequent messaging from Jay Powell and colleagues means we cannot expect yields to pick up on the front end for some time. In fact we could see them drop further – fed fund futures markets recently priced in negative US interest rates.

Such is the pressure on yields right now that even with a dearth of inflation, real yields are at the bottom of long-term ranges.

Charts: US real yields (10yr TIPS) vs gold prices (inverse)

Moreover, the fiscal response from governments to the crisis could create a wave of inflation, particularly as we can see a pivot to Modern Monetary Theory in terms of a coordinated fiscal and monetary response to the crisis.

Whilst the Covid-19 outbreak is at first a deflationary shock to the economy, and therefore usually negative for gold – which tends to act as a store of value against inflation – the aftermath of this crisis could be profoundly inflationary, and therefore supports the bull thesis on gold.

Given the scale of the indebtedness and the dependency on it, the only option is to inflate it away, perhaps by monetizing the debt and overt monetary financing.

Veteran investor Paul Tudor Jones noted in his recent investor letter the increase in the supply of money (M1) could spur gold to fresh all-time highs.

A simple metric based on the ratio of the value of gold above ground to global M1 suggests gold could rally to $2,400 before it reaches valuations consistent with the lowest of the last three peaks in this valuation metric and $6,700 if we went back to the 1980 extremes,” he wrote.

On Friday gold tried to stage a break above the Apr 24th peak at $1738 but failed at this level and pared gains. A breach here would call for a retest of the Apr 14th multi-year high at $1747/8. Whilst long-term there is a bullish case to be made, the chart pattern indicates a battle at these levels and a potential triple top reversal pattern set against the bullish flag pattern.

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