EIA crude inventories preview: Oil up after API report smashes estimates

Commodities

Crude oil and Brent oil are moving higher for a second session today after another massive draw in US oil stockpiles.

WTI has gained $0.70 (+1.8%) and Brent oil is $0.73 (+1.8%) higher. Crude oil has now almost erased the losses incurred since prices tumbled on September 8th.

Crude, Brent up on falling oil stockpiles

The latest oil report from the American Petroleum Institute revealed that US oil inventories fell by 9.517 million barrels in the week ending September 11th. Analysts had expected a draw of 1.271 million barrels.

While crude stockpiles fell last week, gasoline inventories rose. The Labor Day holiday marks the end of the US summer driving season and falling gasoline demand is expected heading into the winter months.

This may already be priced into the market, however, with crude and Brent having languished near their lowest levels since June at the start of the week. Both the Organisation of the Petroleum Exporting Countries and the International Energy Administration revealed more bearish forecasts for the recovery in global oil demand this week.

Hurricane Sally to provide short-term boost for crude oil?

Oil is being leant short-term support thanks to the approach of Hurricane Sally, which is expected to cut between 3 million and 6 million barrels of energy production along the Gulf Coast.

However, the weather system has also shuttered some refineries, meaning that oil demand has also taken a hit.

Will US EIA oil inventories data contradict API numbers again?

While the API numbers are huge it’s worth remembering that latest week’s report was later contradicted by the official Energy Information Administration figures. While the API report showed a draw of nearly 3 million barrels for the week ending September 4th, the EIA data revealed a 2 million barrel build.

It seems unlikely that the EIA numbers would diverge so heavily from the API figures, but it is worth remembering that there are discrepancies between the two data sets.

Global stocks seek direction, Vodafone dividend maintained

Morning Note

Stock markets are in a bit of a muddle right now. On the one hand there are signs of economies emerging from stasis. New York governor Cuomo says three regions of the state will reopen this weekend. Britain has moved from ‘stay home’ to ‘stay alert’, Europe is reopening: there is light at the end of the tunnel, and markets are always first to move. Massive stimulus from central banks and governments helps, too.

But on the other hand, government stimulus can’t go on forever. Businesses will need to get back to a new normal of reduced earnings in the main. House Democrats are said to be plotting a 4th massive stimulus bill this week, but it’s not clear whether this will pass. Signs of second-wave outbreaks across South Korea, China and even Germany stoke fears among investors that economies will, if not shut down again at scale, look very different to before as countries take sustainable steps to reopen. The Bank of England’s Andy Haldane warned that the crisis will leave economic scars, signalling of the long-term loss of demand and productivity we should expect.

Meanwhile, looking a little further out, US-China tensions are really starting to come to the fore. Donald Trump says he is not interested in reopening the phase one trade deal and the president ordered US federal retirement funds to pull investments in China stocks, worth about $4.5bn. Anti-China feeling is growing on a bi-partisan basis in the US and is even spreading to the EU.

Stock markets endured a mixed session on Monday. Wall Street pared early losses to leave the S&P 500 barely moved for the day. The Nasdaq advanced again, notching a sixth straight positive session, as Apple, Facebook, Netflix, Alphabet Microsoft all rose. The Dow Jones was down 0.45% but managed to close 150 points off the lows. The S&P 500 tried to break the 61.8% retracement at 2934 but fell just short at 2930. European markets fell, with the Stoxx 600 down 0.4%, albeit the FTSE 100 notched a tiny gain.

This morning, European markets again moved either side of the flat line. Really it looks like markets are lacking any conviction to break through to new post-trough highs.

Vodafone advanced as the company kept its dividend – already cut back a year ago to 9 euro cents. Vodafone can afford to do this since free cash rose more than 12% to €4.9bn. Longer-term, demand for data will only rise. Vodafone shares rose 4%, lifting Telecoms to the top of the Stoxx 600 with Healthcare close behind – this is not a risk-on rally. Ryanair shares rose over 2% after it said it would restore 40% of capacity by July.

Elsewhere, the US dollar is higher, with the dollar index rising to a two-week high on higher US yields and demand for safety amid signs of second wave infections. EURUSD took a 1.07 handle overnight before rallying to test the 100-hour simple moving average at 1.0820. GBPUSD is pretty well slap in the middle of the range it has traded within since the end of March at 1.2320.

Gold trades either side of $1700 in a fairly tight range but could come under pressure should US yields advance further.

Brent and WTI futures settled lower on Monday despite Saudi Arabia saying it will cut an additional 1m barrels per day from its output in June, which would take its total production cut from April levels to 4.8m bpd next month. Kuwait and the UAE joined in support with their own additional voluntary cuts beyond what OPEC++ had pencilled in. The worry for the market seems to be that there is just no demand, rather than extra goodwill on the part of the Kingdom to rebalance the market sooner. Futures traded a little higher on Tuesday. The concern is really there is still no demand.

Morning Note: European markets lower, oil gains, pound under pressure

Equities
Forex
Indices
Morning Note

European markets opened lower, with the major equity indices pulling back after Wednesday’s kneejerk move higher amid a very noisy, confusing picture for investors regards trade, growth and interest rates.

The FTSE 100 lost 20 points to retreat to 7275, losing the 7300 handle achieved yesterday. Auto stocks are weaker this morning – perhaps a dose of reality in the cold light of the morning after yesterday’s gains. 

Markets recovered ground yesterday, switching from red to green sharply as reports suggested the US will delay auto tariffs by six months. This, combined with some more jawboning from Mnuchin on trade talks, tended to ease the worries about the US-China trade spat. 

But the US president add pressure elsewhere – issuing an executive order banning US firms from working with Huawei. Lots and lots and lots of noise from all sides – making this a tough market to be in.

SPX bounced off support around the 2817 level, which was a big area of resistance in the not-too-distant past, to close at 2,850. 

Bonds bid

The 10-year Treasury remains below 2.4%, with bonds finding bid as the US retail sales and industrial production numbers missed yesterday. 3m-10yr inversion again flashes the recession amber lights – expect to hear more of this talk even though the US seems a long way from recession right now (3.2% print GDP, consumer spending and retail sales at multi-year highs, unemployment at 50-year lows…I could go on).

Oil rallies

Oil – Brent has rallied above $72. Bullishness seems to be down to mounting geopolitical risks in the Middle East. Specifically, oil is higher because the market is worried that the US and Iran are at risk of a flare-up. Oil rose despite a surprise build in US inventories, which were up 5.4m barrels in the last week according to yesterday’s EIA data. We also saw a build in inventories in Cushing.  

Meanwhile the IEA revised its demand growth outlook lower by 90k barrels a day to 1.3m. Whilst this was bearish, the group also highlighted the significant supply side uncertainty – Iran, Venezuela, Libya etc. As we noted in a recent strategy note on oil, the IEA says the supply picture is ‘confusing’. 

Sterling under pressure

FX – Unemployment data from Australia overnight came in weaker and leads us to assume the RBA will cut over the summer (or winter). Although employment rose, jobs growth seems likely to slacken. The RBA has made it perfectly clear that should inflation or unemployment not improve it will be cutting soon. This may well create further downside on the Aussie, which is of course under pressure from the whole China-trade-growth story.

AUDUSD is seriously threatening the 0.69 level on the downside. There is a lot of pressure there and it could go, which would open up move to 2016 lows at 0.68. We’re at multi-year lows here so there is a lot of support to contend with. Whether AUDUSD gets squeezed lower still though will depend on whether the RBA signals it’s one (maybe two) and done, or if it’s embarking on a longer-term easing cycle. 

GBPUSD remains below the 1.2860 level having breached this important support yesterday. Brexit worries abound – it’s either no deal or no Brexit by the looks of things. Next up we could see it slip to the mid-Feb lows around 1.2780. Below that we start to consider a return to the 2019 lows around 1.24 as a possibility. The rebels are putting their pieces in place to oust May if (when) her Brexit bill fails against for the umpteenth time.  Meanwhile as we noted yesterday’s note, amid a broad downturn in risk appetite the pound is exposed. EURGBP is advancing past the 0.87 marker and was last at 0.874, pushing up to 0.88 and the Feb highs.”

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