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.

Stocks off a little at month end, US-China tensions rise

Morning Note

What did they do just when everything looked so dark?
Man, they said “We’d better accentuate the positive
Eliminate the negative
And latch on to the affirmative”

Stocks are ending May on a slightly downbeat note, but investors have definitely been accentuating the positive this week and for the whole of May.

Thank goodness, Covid-19 is getting bumped off the headlines; trouble is it’s not for good news. At last though we are seeing some caution displayed in the markets over China’s decision to impose national security legislation on Hong Kong and the ensuing ramp up in US-China tensions.

US stock markets close in the red, Trump to give press conference on China

US stocks were positive for most of Thursday before sharply reversing in the last hour and closing in the red, after the White House announced that Donald Trump would hold a press conference on China on Friday. ‘We are not happy with China. We are not happy with what’s happened’, he said. The UK, which signed a joint statement condemning China for its actions with Australia, Canada and the US, is opening the door to citizenship for 300,000 Hong Kong residents.

Given how stretched valuations have become, worries about US-China tensions don’t seem fairly priced in. As previously noted, investors need to be prepared for things to get worse from here, particularly given the back drop of a looming election for a second term, the worst recession in memory and 100,000 deaths from Covid – blamed on China – and the trade war, which is still rumbling on.

The pressure on Donald Trump at home is high. The press conference today will likely see Trump increase the war of words with China but he could go further an announce further sanctions on individuals associated with law, or revoke Hong Kong’s special status with the US on trade.

The S&P 500 was up most of the session but closed 6 points lower at the death, whilst the Dow fell 0.6% to 25,400, crumbling 300 points in the last 45 minutes of trading on the news of the White House presser.

Overnight, shares in Hong Kong fell again. European equities followed suit on Friday, declining by around 1% after a decent run in the previous session. The FTSE 100 faded off the 6200 handle reclaimed on Thursday. Hong Kong and China focused HSBC was down another 2.5%. But the FTSE was still headed for a roughly 200-point gain this week. European equities are still firmly higher this week as investors rotated somewhat away from the Covid/tech/quality play and back into cyclicals as economies reopen without undue rises in cases.

The Nasdaq, which has notably outperformed on a year to date basis, has markedly underperformed benchmarks this week. Remember it’s the last day of the month of May – it’s been a solid week and month for equities so investors may seek to take a little risk off the table going into the weekend and into June. The Hong Kong/US/China situation is all the excuse needed.

Data continues to show the dire economic impact of Covid-19

The economic data still stinks. 1 in 4 Americans have lost their jobs since Covid hit. US initial jobless claims rose another 2m to top 40m. But it’s slowing, with the weekly count down again for the 8th straight week. Moreover, continuing claims fell 3.9m to 21.1m, which indicates the labour force is returning – hiring is beating firing again, but it will be a long slow process to recover the 40.8m jobs lost, far longer than it took to lose them. A portion will be lost forever.

The US economy slowed more than previously thought, with the second GDP print for Q1 at -5%, vs 4.8% on the initial print. The Atlanta Fed GDPNow model forecasts Q2 GDP down 40.8%.

French GDP in the first quarter was down just 5.3% vs the 5.8% initially printed. Retail sales and industrial production in Japan both declined by more than 9%. Retail sales in Germany dropped 5.3% in April, not as bad as the -12% forecast – spendthrifts! Meanwhile those frugal French consumers spent even less than forecast, with spending down more than 20% vs a 15% declined expected. France is though reopening its culturally vital bars, restaurants and cafes from next week, so that should get consumers parting with a few more sous.

Dollar offered despite risk-off trade in equities

Despite the risk-off to trade in equities the dollar was offered into the month end. The euro extended its rally after breaking the 200-day moving average yesterday, with EURUSD pushing up to 2-month highs at 1.11. The March peak at 1.1150 is the next target. Sterling was also firmer against the buck, with GBPUSD recovering the 1.23 handle, trying to hold the 50-day line as support.

Shares in Twitter declined by more than 4% as Donald Trump signed an executive order that paves the way for legislation to tighten rules for social media platforms around third party content liability. It’s probably all a lot of hot air and distraction as he pursues a personal vendetta following the fact check warning on a couple of his tweets. Nevertheless, we have consistently warned that social media companies will need to face up to more and more scrutiny and tighter regulation around content distribution and the use of personal data.

Oil first fell but since recovered after EIA figures showed a build in crude oil inventories. Crude stocks rose 7.9m barrels, though inventories at Cushing, Oklahoma, declined by 3.4m. WTI (Aug) was hovering around $33 at send time, just about slap in the middle of its consolidation range.

Equity indices clear big hurdles even as Hong Kong tensions simmer

Morning Note

Tensions between the US and China are worsening, with the two sides clashing at the UN over Hong Kong. China rejected a US proposal for the Security Council to meet over the issue, whilst US secretary of state Mike Pompeo declared that Hong Kong is no longer autonomous from Beijing. China’s ‘parliament’ this morning approved the controversial national security legislation for the territory.

We also note reports this morning that China escorted a US navy ship out of its waters. Meanwhile Taiwan is to buy Harpoon anti-ship missiles from the US, which is likely to further rile Beijing. Tensions are showing signs they could boil over – we cannot play down the importance of an embattled US president facing a national crisis at home in an election year – one he can blame on his chief geopolitical adversary. Expect more sabre rattling.

Shares in Hong Kong and Taiwan fell, whilst Japanese equities rose by more than 2% in a mixed session overnight in Asia. The FTSE 100 rallied towards 6200 on the open, but shares in Standard Chartered and HSBC fell, signalling investor concern about what’s going on in Hong Kong.

Nevertheless, equity markets continue to strengthen and move out of recent ranges and clear important technical resistance. Confidence in equity markets is strong thanks more stimulus and signs economies are reopening quicker.  A resurgence in cases in South Korea is a worry.

Yesterday, US stocks surged with the S&P 500 closing above 3,000 for its best finish since March 2nd, whilst the Dow added over 500 points to clear 25k at stumps. The S&P 500 cleared the 200-day moving average and is now trading with a forward PE multiple of about 24x – making it look decidedly pricey.

European followed Wall Street higher with broad-based gains. The DAX yesterday closed above the 61.8% retracement around 11,581 and extended gains through the 11,700 level. The FTSE 100 thrust towards 6200 this morning, hitting its highest intra-day level since March 10th. The 50% retracement around 6250 is the next target before bulls can seek to clear the gap to the March 6th close at 6,462.

EasyJet is planning to reduce its fleet by 51 and cut up to 30% of staff. This is the big fear playing out – temporary furlough becomes permanent firing once businesses figure out that demand has vanished. Whilst airlines will feel this more than just about any other sector, this trend will be seen in a wide range of industries, albeit to a lesser extent.

Shares in EZJ rose 8% – cost cuts are welcome of course for investors, but also the indication of running at 30% of capacity over the summer is better than had been feared. Efforts by the likes of Greece and Spain to salvage the summer season will help a lot. IAG and Ryanair shares rose 2-3%.

Twitter shares fell and were down more in after-hours trading after Donald Trump threatened to shut down social media sites that stifle conservative voices. Having been sanctioned by Twitter with fact-check warnings, the president is very unhappy. It hurts his ego and it blunts his most effective tool.

The White House said the president will sign an executive order on social media today. Facebook shares were also lower yesterday and extended losses in after-hours trade. Will Trump try to silence Twitter and Facebook? No, but he can put more of a regulatory squeeze on them and raise their costs.

Europe’s bailout proposals were greeted with optimism, but the frugal four countries of Austria, Denmark, Sweden and the Netherlands did not seem terribly impressed at plans that will raise their budget contributions. They will need to be brought round. Estonia has also said it won’t vote for the proposals. Work to be done – getting all countries on board with a complex budget takes a long time in the best of circumstances, let alone amid a dreadful recession.

The euro has largely held gains after rising on the EU’s budget plans. EURUSD firmed above 1.10 but is struggling to clear the 200-day moving average around 1.1010. Bulls need to see a confirmed push above this to unlock the path back to 1.1150, the March swing high. Failure calls for retest of recent swing lows at 1.0880.

Sterling was steady with GBPUSD around 1.2270 after yesterday giving up the 1.23 handle and testing support at 1.220 following Britain’s chief Brexit negotiator gave a pretty downbeat assessment of trade talks to MPs.

Today’s data focuses on the US weekly unemployment claims, which are forecast at +2.1m. As we enter the summer and states reopen, the hiring will gradually overtake the firing but we are not yet there. Durable goods orders – an important leading indicator of activity – are seen at –19% month-on-month with the core reading seen at –14.8%. A second print of the US Q1 GDP is seen steady at –4.8%.

Oil dived and took a look at last week’s lows as API figures showed a surprise build in crude inventories in the US. Stocks rose by 8.7m in the week ending May 22nd, vs expectations for a draw of 2.5m barrels. The build in stocks means the EIA data today will be more closely monitored than usual, given that expected drawing down of inventories has underpinned the resurgence in crude pricing. WTI (Aug) slipped back to $31.60, just a little short of the May 22nd swing low.

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:

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