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.

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

Oil prices spike on surprise draw

Commodities

WTI futures and Brent futures spiked to highs of the day after a surprise draw on US oil stocks. EIA figures showed a 745k barrel drawdown vs an expected build of more than 4m barrels. Stocks at the key Cushing, Oklahoma hub feel by 3m barrels, the first such draw since February. Gasoline inventories fell 3.5m barrels vs 2.2m expected. Distillates continued to build at 3.5m. Refinery inputs averaged 12.4m bpd, which was 0.6m bpd less than the previous week’s average.

WTI (Aug) rallied above $27.80 before paring gains to trade roughly in the middle of today’s range around $27.30. Front month (Jun) oil was up at $26.30. The draw on inventories, particularly at Cushing, will spur hopes demand is coming back as economies reopen and that we are not approaching ‘tank tops’ as swiftly as feared. However there are still risks that at least for the Jun and Jul contracts we see high levels of volatility as we approach expiry.

OPEC updates demand forecast, sources suggest further production cuts

Earlier, OPEC said crude oil demand in 2020 would fall even further than previously thought. In 2020, world oil demand growth is forecast to drop by 9.07m bpd, an adjustment lower of more than 2m bpd from the prior report.

In its monthly report it said the contraction is concentrated in the second quarter and mostly in OECD Americas and Europe, with transportation and industrial fuels affected the most.  As such, OECD oil demand is now revised lower by 1.20m bpd while non-OECD oil demand growth was adjusted down by 1.03m bpd.

Demand contraction in 2020 can be mitigated with sooner than expected easing of government COVID-19 related measures, and faster response of economic growth to the implemented extraordinary stimulus packages,” OPEC said.

In terms of supply, a raft of announcements from OPEC members has pointed to greater cuts than previously estimated. In addition, sources have talked about extending the 9.7m bpd cuts beyond June. I think this mainly reflects huge demand destruction and nowhere to put the crude more than increased willingness to ‘take one for the team’. Meanwhile the cartel believes the collapse in prices will further affect non-OPEC supply. Non-OPEC oil supply in 2020 is revised down further by almost 2m bpd from the previous projection, and is now forecast to decline by 3.5m bpd.

The main revisions of the month are based on production shut-ins or curtailment plans announced by oil companies – including the majors – particularly in North America. Globally, excluding the OPEC++ 9.7m bpd cut, around 3.6m bpd of production cuts have been announced, so far, in response to the lack of demand, low oil prices, excess supply and limited storage capacity. And yet in April, OPEC crude oil production increased by 1.8m bpd from March.

Upbeat start for European equities

Morning Note

No Monday morning blues for equities after the Bank of Japan announced more stimulus and we’ve some good news from Italy at last and even Deutsche Bank has reported a profit.

The BOJ laid down the gauntlet to the Federal Reserve and European Central Bank, who both meet later this week, by raising its package of support. The BOJ will now buy unlimited government bonds (JGBs), catching up with market expectations, and is increasing how much corporate and commercial paper it buys.

The moved gave an upbeat tone to trading in Asia. Tokyo rose 2.7% whilst Hong Kong rose 2%. European shares followed suit with the FTSE 100 opening above 5800 and the DAX reclaiming 10,500. Indices remain in consolidation phase and risk rolling over as momentum fades, but the news today is quite positive. US futures are positive after closing higher on Friday but falling over the course of the week.

Italian and German yield spreads came in after S&P didn’t downgrade Italian debt. This is good news for the ECB, which may well increase its pandemic asset purchase programme by €500bn this week.

On the Covid-19 front, Italy is also making progress and will relax lockdown measures from May 4th. Spain has reported its lowest daily death toll in a month. Boris Johnson is back to work.

Meanwhile Deutsche Bank reported exceeded expectations on profits and revenues in the first quarter but warned on loan defaults as a result of Covid-19. Investors shrugged off the warning and shares rose 7%, sending European banking stocks higher by around 3%. It’s a very big week for earnings releases – HSBC, BP, Shell, Amazon, Alphabet, Facebook and the rest.

Oil has taken a turn lower as fears of approaching ‘tank tops’ imminently. The June WTI contract is starting to show stress, gapping lower at the open last night and trending lower to approach $14. Brent is –5% or so at $23.50. Goldman Sachs estimates global storage capacity will be reached in just three weeks, which would require a shut-in of 20% of global output. That would chime with what we’ve been tracking and suggests OPEC+ cuts of 9.7m are – as anticipated – not nearly enough. It will make the Brent front-month contract liable to volatility, though perhaps not quite what we have seen in WTI. Baker Hughes says oil rigs in the US were down 60 in the week to Apr 24th to 378, the fewest active since 2016 and well under half the number this time a year ago.

In FX, speculators are dialling up their net long bets on the euro. The Commitment of Traders (COT) from the US Commodity Futures Trading Commission shows euro net longs rose to 87.2k contracts in the week to Apr 21st, the most since May 2017. Traders turned long at the end of March and have been adding to positions since. The last time a move like this occurred in EUR positioning in 2017 it preceded a 15% rally in EURUSD.

Meanwhile, speculators net short bets on the USD are now at the highest in two years as traders call the top in the dollar. Traders habitually call the top in the dollar and get it wrong. Various actions taken by the Fed to improve liquidity and an easing in the market panic we saw in March has helped, but the dollar remains the preferred safe harbour in times of market stress.

EURUSD – the last time specs turned this long was in May 2017.

DAX – rangebound, approaching top Bollinger band.

Europe firms as Brent follows WTI’s lead lower

Morning Note

European markets are cautiously higher after yesterday’s decline, but the daily momentum indicators are fading. The reality of economic collapse is being seen in oil markets, but – juiced by central bank support and of course being much more forward-looking than, for instance the June oil contract – equity markets are displaying greater optimism. I’d say oil markets are telling us how bad things are right now, while equity markets tell us how good or bad investors hope/fear things will be next year.

Now it’s the turn for Brent. Turmoil in global oil markets dragged Brent futures under $16, leaving the front month trading at its weakest since 1999. The collapse in WTI at the start of the week has spooked the market and now we see similar concerns about floating storage starting to fill up as physical storage constraints worrying WTI. The roll this Friday could be gappy, although Brent is cash settled, not physically, so in theory it ought not to be as troubled and negative prices are unlikely. That said, if global storage is running out – and that is what the Brent trade is starting to suggest – then there will be no bid and prices could hit zero.

WTI remains under pressure with the June contract suffering a ‘flash crash’ yesterday as it slumped as low as $6.50 before recovering above $10. The June contract, whilst not immediately facing the same liquidity problems as the May contract did on Monday, is going to be under pressure all the way to expiry with nowhere left in the US to take physical delivery. It too could turn negative if paper traders are left holding the baby close to expiry. July is trading around $18.40, August is above $21. Edward Morse, head of commodities at Citigroup, says oil could bounce back to $50 by the end of the year.

Meanwhile the damage is being felt in oil ETFs which are needing to shift their holdings further out in future months. The United States Oil Fund (USO) is ditching its June holdings as it tries to shore its balance sheet, and this will be having an impact on the front month trading. It will also be sharpening the super contango. It becomes a vicious circle as long as no one wants to take delivery. Yesterday saw more than 2m June contracts traded, the CME Group said, the busiest single day for the month ever.

The pain in oil markets is unsettling risk appetite more broadly, with the S&P 500 down 3% and the Dow shedding over 600 points yesterday. It was the worst day for the three main indices since April 1st. Charts and momentum suggesting the rally has lost steam and 50-day SMAs (blue line) almost seem to be frightening the market and forcing it to back off. The question is whether sentiment sours from here and we retest the lows or it’s just a pause in the rally. Earnings are not telling us an awful lot as uncertainty reigns. The key is the emergence from lockdown and restart of economies. And of course, finding a vaccine.

Dow Cash, 1-Day Chart, Marketsx – 08.32 UTC+1, April 22nd, 2020

Whilst European markets are higher today after yesterday’s drop, the momentum is fading and the DAX has broken under trend support. Again the 50-day SMA is major barrier.

DAX Cash, 1-Day Chart, Marketsx – 08.35 UTC+1, April 22nd, 2020

A major boost for Netflix as it added almost 16m new subscribers in the first quarter, well ahead of expectations. The company has been boosted by lockdown measures and should see more net subscriber adds in Q2 but notes in the circumstances it’s all ‘guess work’. But this might be as good as it gets this year – Netflix won’t get a better opportunity to gain new members than now. I’d also be concerned that after such a big runup in the stock to all-time highs, the upside is pretty well discounted now and viewing figures will start to decline as lockdowns end. A stronger dollar is hitting foreign earnings and spending on content is delayed by production shutdowns. EPS was a slight miss but Netflix profits are always a little lumpy due to inconsistent spending on content.

In FX, GBPUSD broke down through near-term horizontal support and out of its range yesterday and with the bearish bias persisting the next level comes in around 1.2160, the Apr 6th and late March swing lows. Near-term though the 1hr MACD is positive after a potentially bullish crossover late yesterday.

GBP/USD, 1-Day Chart, Marketsx – 08.35 UTC+1, April 22nd, 2020

 

Oil tumbles again, US futures weak

Commodities

More than just a rollover issue? Oil markets are in turmoil again today as both Brent and WTI contracts come under severe pressure, with volatility extremely elevated.

Severe dislocation in the May contract is spilling over into future months with the benchmark June WTI contract tumbling 40% or so to take an $11 handle at one point this morning. It’s rebounded very sharply back to $16.50. July remains firmer above $20. Whilst the May contract went absurdly low because traders had to avoid taking physical delivery at all costs, the forward contracts look too high when you consider how much demand destruction is out there. If this super contango market persists we may see further implosions like we saw yesterday as we approach settlement as traders are caught the wrong side of the expiry with nowhere to put it.

We are also seeing spill-overs into Brent which is facing the challenges with the front month – which we roll this Friday – dipping under $20 before paring losses and rallying back to $22. We will watch this one carefully to see whether it too shows severe stress, however volumes in the Jun contract remain high, unlike the May WTI contract which had become very illiquid. Fewer constraints on storage and the fact Brent is a seaborne commodity will help and should mean it outperforms WTI in the coming months.

We’ve talked at length about this already with regards to the fact storage constraints are not going away any time soon unless you get a pickup in demand, which is not forthcoming. I think also demand destruction is worse than the refiners thought it would be. We also note the reports of a large volume of Saudi oil making its way to the US, which were loaded and shipped prior to OPEC+ deal when the Saudis were flooding the market with cheap crude.

Fundamentally there is still a massive supply-demand imbalance which will take time to work its way through. OPEC+ cuts won’t really help for at least a month. We need to see the US economy moving again for WTI to recover.  US producers don’t want to endure the cost of voluntary shut-ins, it’s just not that easy to turn taps off.

Equities are suffering the fallout from this oil implosion with European bourses -c2% and the Dow set to open around 400 points lower and the S&P 500 likely to fall below 2800. I would worry about what impact this crude market stress will have on credit markets and banks in particular as these companies won’t be able to pay their debt. Remember US shale was facing a wall of debt this year through to 2022 that already threatened to blow a hole in the industry.

Whether we look at WTI or Brent, bulls will hope the rejection of the lows marks a bottom but the pressure appears relentless.

Brent Oil Futures, 1-Hour Chart, Marketsx – 11.05 UTC+1, April 21st, 2020

Crude Oil Futures, 1-Hour Chart, Marketsx – 11.05 UTC+1, April 21st, 2020

Oil leads global market tumble on ‘Black Monday’

Equities
Forex
Indices

The collapse of OPEC+ talks over the weekend tipped markets into chaos on Monday. Traders, already on edge due to the unfolding coronavirus epidemic, were sent fleeing to safety after Saudi Arabia slashed its crude oil prices.

Crude and Brent tumbled over 30%, their worst daily performance since the Gulf War, hitting lows below $27.50 and $31.50 respectively. The Kingdom cut prices for April crude by 30% and stated that it intends to raise its output above 10 million barrels per day. Talks at the weekend saw OPEC and its allies fail to agree new terms for an oil production cut; OPEC+ couldn’t even agree to extend the current level of cuts, let alone deepen the cuts to battle the hit to demand from the coronavirus outbreak.

Saudi Arabia is well-positioned to weather weak prices and Russia claims it can withstand the pressure for up to a decade. US shale oil producers, who have flooded the global market with oil to take advantage of supported prices and are heavily debt-laden, could be in dire trouble.

Equities tank

Global equity markets have been sent tumbling. The collapse in the oil markets, combined with news that the Italian government has imposed travel bans on 16 million people, sent investors running from stocks.

US futures went limit down after triggering circuit breakers during the Asian session. After a 5% drop the Dow was indicated to open down over 1,300 points, but based upon the ETF market – which is not suspended – the Dow was looking at a drop of 1,500. Asian stocks took a hammering, with the Hang Seng and the Nikkei both closing over 1,100 points lower.

European equities sank as well, with the DAX, and Euro Stoxx 50, all off around 7%. The FTSE 100, also down 7% to test 6,000, was trading at levels not seen since the immediate aftermath of the Brexit referendum.

Stocks most at risk

While stocks across the board tanked, several industries were hit harder than others.

Oil majors slumped. BP (LSE) tumbled 20%, ExxonMobil dropped 17%, Chevron tumbled 16%, and Occidental cratered 38% – all in pre-market trading on the NYSE – while Royal Dutch Shell fell 14%.

Airlines were hit hard as well after the price slump left them sitting on big losses after hedging oil at higher prices. American Airlines, Delta Airlines, Southwest Airlines and United Airlines were all down 5-6% in the pre-market.

Coronavirus fears weighed on tech stocks. The FAANGS all recorded losses in the range of 6-7%, but cruise ship operators were hit harder. The US government warned American citizens not to go on cruises. Carnival – the company that owns many of the ships currently stranded due to on-board quarantines – dropped 10%, Norwegian Cruise Lines tumbled 11%, and Royal Caribbean Cruises slumped 12% – all before the markets opened.

New record lows for US bonds

The flight to safety drove the yield on US government debt down to record lows. Yields move inversely to prices. The yield on the US 10-year treasury bond fell to 0.32% while the yield on the 30-year treasury note fell towards 0.7%, breaching 1% for the first time in a year.

Gold traded around $1,673 after hitting $1,700 over the weekend.

Cryptos join in with global market chaos

The cryptocurrency market is no stranger to volatility. The world’s largest cryptocurrencies were down around 10-15%, with Bitcoin falling below $8,000.

Oil spikes as Iran responds, Trump to speak

Morning Note

Geopolitics will dominate the session on Wednesday as traders grapple with the US-Iran fracas. Geopolitics always means uncertainty – we simply cannot know what will happen next, so look carefully at positions as markets are liable to knee-jerk moves.

Oil and gold spiked and stocks fell as Iran fired 22 surface-to-surface missiles at two US airbases in Iraq, in direct retaliation for the killing of Soleimani. So we know the Iranian response at last – this could actually reduce uncertainty unless we see escalation.

The next move lies with the US. Iran said the attacks were ’concluded’ and said it is not seeking a broader conflict. “We do not seek escalation or war,” Javad Zarif, the Iranian foreign minister tweeted in English. The implication is that they will not carry out further reprisals and wish to draw a line under the situation. Frankly they’ve barely scratched the US with this attack – it appears like nothing but a way to save face. Threats to hit Dubai and Haifi are frankly ridiculous.

However Donald Trump has said previously he would respond to any reprisals with his own. The president plans to address the media on Wednesday morning eastern time.

Following the attacks he tweeted:

“All is well! Missiles launched from Iran at two military bases located in Iraq. Assessment of casualties & damages taking place now. So far, so good! We have the most powerful and well equipped military anywhere in the world, by far! I will be making a statement tomorrow morning.”

The president has a chance to de-escalate – but does he want to? My inclination remains that a broader conflict will be averted, largely because Iran does not want to be lured into a regime-changing conflict before it has the bomb, even if that’s what the US is seeking. But increasingly there is the risk of miscalculation as neither side wants to back down.

Meanwhile, a Ukrainian passenger jet crashed shortly after take-off in Tehran with all 176 souls lost – not sure what this means or whether related. It was a Boeing. The coincidence is too much to ignore – it was surely caught in the crossfire?

Oil surged as the Iran strikes broke but has pared gains. WTI jumped to $65.60 but has since retreated to a little above $63. The May 2019 peak at $66.60 remains intact for the time being. Brent rallied north of $71 but subsequently fallen back to $69. Should this escalate quickly into a broader conflict there is a risk of supply disruption in the region that could send Brent to $80 a barrel. However, we must as ever stress that the global oil market is simply not exposed to shocks like it once was.

Gold surged to new 7-year highs at $1610 before easing back to $1590. Net longs are already stretched – is there any more this can run? As ever keep an eye on US real yields. Against this backdrop of rising geopolitical tension oil and gold are making new highs and higher lows for the time being. Gaps need to be filled quickly or they don’t get filled.

US stock market indices weaker on Tuesday handing back much of Monday’s rally, and we will see the impact of the Iranian reprisals dent European stocks on Wednesday. US futures have dipped but erased most of the initial drop following the strikes. Dow last trading around 28445 having dipped under 28150.

We need this US-Iran stuff to go away to focus again on the data. US services ISM yesterday was v good but Europe is still not swinging. German factory orders were below expectations coming in -6.5% yoy vs expected -4.7%. But the Ifo momentum points to turnaround coming.

In FX, GBPUSD has held the key support around 1.3140 to trade at 1.3150. Brexit comes back on the agenda but the exit is now a done deal. EURUSD is steady at 1.1150 but the failure to surmount 1.12 raises downside risks near-term.

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