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US oil inventories preview: Crude rebounds after hitting lowest levels since July 1st
Crude oil touched the lowest levels since the start of the month today as investors fretted over the pace of reopening in the world’s major economies. WTI fell to $39.27, but has since rebounded to trade $0.54, or 1.3%, higher at $40.29.
Crude oil remains rangebound ahead of this week’s main events, with $41.00 providing resistance and support at $39.00.
Oil unsteady as California orders bars to close
Risk sentiment has been knocked across the board after Californian governor Gavin Newsom ordered bars across the state to close and indoor operations to halt in restaurants, cinemas and museums.
The measures have raised questions over how quickly the world’s major economies can afford to reopen. California’s shutdown was prompted by an increase in the average number of new Covid-19 cases to over 8,000 per day during the past week.
OPEC committee to review production cuts
The timing of the shuttering in California is particularly troublesome for the oil markets, given that OPEC’s Joint Ministerial Committee meets this week to review the level of production cuts. The cartel is expected to taper the level of cuts by about 2 million barrels per day from August, down from the current record 9.7 million bpd.
OPEC Secretary General Mohammad Barkindo had said on Monday that the gradual easing of lockdown measures across the globe, in tandem with the supply cuts, was bringing the oil market closer to balance. An unwinding of the cuts just as some economies put the brakes on activity again threatens to send oil prices lower.
EIA data: Draw expected, but are the forecasts accurate?
Prices are also being kept contained ahead of the US Energy Information Administration’s weekly crude inventories report. The latest EIA data is expected to show a draw of 2.275 million barrels after last week’s surprise build of over 5.6 million barrels.
Data from the American Petroleum Institute is due at 20.00 UTC today and could provide better guidance, given that consensus expectations for the EIA report have been wide of the mark over the past few weeks.
US oil inventories preview: EIA data to confirm the biggest draw this year?
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.
Equities hold ranges, gold jumps as US real yields sink
Equity markets are still looking for direction as they flit about the middle of recent ranges. Fear of a second wave of cases is denting the mood today, as the so-called R-number in Germany jumps to 2.88, US cases hit the highest level since early May, and Apple closes more stores in the US.
White House trade adviser Peter Navarro said the US is preparing for a second wave in the autumn – it’s debatable whether the current spike in cases in some states is still part of the first wave. Equity markets remain sensitive to headline risk around virus numbers, stimulus and economic data, but we are still awaiting signs of whether the strong uptrend reasserts itself or whether we see a more serious pullback.
Looking at the pullback over the second week of June, the major indices are still hovering either side of the 50% retracement of the move. Momentum may start to build to the downside should cases rise, and restrictions are re-imposed. For now, the indices are simply bouncing around these ranges. The question is whether markets finally catch up with the real economy – the disconnect between Wall Street and Main Street is a worry for those who think the market has rallied too far, too fast.
Economic data will continue to show a rebound, glossing over the fact that the numbers on the whole still indicate a severe recession. However, to make the bull case – the Fed and central bank peers are on hand and the old maxim still stands: don’t fight the Fed. Meanwhile there are record amounts of cash sitting on the side lines and bond yields on the floor – and will be for a long while – making equities (FTSE 100 dividend yield at 4% for example), more appealing.
The FTSE 100 opened down 1% and tested the 50% line at 6,223, whilst the DAX pulled away from its 50% level around 12,250 ahead of the open to fall through 12,200 before paring the losses. Asian markets were softer, whilst US futures indicated a lower open after falling on Friday – ex-tech.
Oil (WTI – Aug) ran out of gas as it tried to clear the Jun peak at $40.66 but remains reasonably well supported around the $39-40 level. We look at a potential double top formation that could suggest a pullback to the neckline support at $35. Imposing fresh restrictions on movement may affect sentiment ahead of any impact on demand itself, but OPEC+ cuts are starting to feed through to the market and we could be in a state of undersupply before long.
The risk-off tone helped lift gold to break free of the $1745 resistance, before pulling back to test this level again. The rally fizzled before the top of the recent range and recent multi-year highs were achieved at $1764. Whilst benchmark yields have not moved aggressively lower, with US 10s at 0.7%, real yields as indicated by the Treasury Inflation Protected Securities (TIPS) are weaker. 10yr TIPS moved sharply lower over the last two US sessions, from –0.52% to –0.6%, marking a new low for the year and taking these ‘real yields’ the lowest they’ve been since 2013.
Real yields are currently negative all the way out to 30 years.
In FX, GBPUSD started the week lower but has pulled away off the bottom a little. The momentum however remains to the downside after the failure to recover 1.2450. Bulls will need to clear the last swing high at this level to end the downtrend, though this morning the 1.24 round number is the first hurdle and is offering resistance.
CFTC data shows speculative positioning remains net short on GBP. Meanwhile net long positioning on the euro has jumped to over 117k contracts, from a steady 70-80k through May. Nevertheless, the current trend remains south though the 1.12 round number is acting support – the question is having seen the 1.1230 long-term Fib level broken, do we now and perhaps test the late March high at 1.1150.
Second wave fears weigh on risk
The dreaded second wave: Houston is weighing a new lockdown as it warns of a disaster in-waiting. Other states with large populations and economies like California and Florida are also worried about rising Covid case numbers. Across Europe the reopening continues with little to suggest of a disastrous second wave.
Stocks went into freefall yesterday as the untruths of the reopening trade got found and this particular bubble got pricked. As we discussed, fears of a second wave combined with the Fed well and truly killing off the V-shaped recovery idea.
The Dow tumbled nearly 7%, whilst the S&P 500 fell almost 6%. The forward PE multiple on the latter – which I like to track as a broad indicator of whether stocks are overbought – has retreated a touch but at 23+, it’s still rather pricey. The Vix shot above 40.
Futures indicated a little higher but I don’t fancy the chances heading into the weekend. You could say that Thursday’s tumble was basically just the Fed trade and has now played out so we need to look for new information to act as a catalyst, but the second wave fears persist.
European stocks volatile on the open
European stocks also got whacked and were extremely volatile in the first hour of trading on Friday as the bulls and bears pull either end of the rope. The bears were winning at time of writing. We do seem to be at a key moment as the market makes up its mind – are we due a proper retracement of the recent rally or is this just a normal pullback before resumption of the trend higher. I would tend to favour the former.
The good news for the likes of the FTSE is that it’s underperformed since the March trough, versus its US counterparts. It’s also got an appealing dividend yield, despite some very noteworthy cuts and the prospect of BP likely needing to cut its pay-outs. From a technical point of view there seems to be strong support just a little below where it’s currently trading.
UK posts record GDP drop in April
ONS data shows the UK economy declined over 20% in April, the worst decline on record. It’s backward-looking of course, but it underlines how much of a recovery is required to get back to normal. The slow lifting of restrictions – pubs and cafes are still not open – means the UK may endure a wider bottom than many others, making recovery all the slower. All this before the jobs Armageddon this autumn when furlough support ends.
Chart: FTSE 100. The index has broken out of the channel on the downside. The three black crows candle pattern signal weakness and when combined with the bearish MACD crossover in overbought levels, suggest a pullback is not done yet. There is decent support around the previous Fib support level and the 50-day simple moving average in the 5800-5900 region.
Chart: S&P 500. The broad index closed at the lows, but bulls will be looking for the 200-day moving average around 3020 to hold. The area around 2975 at the bottom of the channel still looks appealing and if breached could act as a gateway to 2800. Another bearish MACD crossover in overbought levels signal weakness and a retrace of some of the recent rally.
Oil fell with other risk assets. WTI for August has moved back to test the $35 support level, with a potential retreat to the $31.50 area next if the trend continues. A bearish MACD crossover is again evident, signalling weakness.
Could natural gas prices follow WTI and go negative?
Natural gas prices could follow oil into negative territory, according to Wang Yusuo, the chairman of ENN Energy Holdings, one of China’s largest distributors. According to a Bloomberg report, he said a lack of storage could send prices negative for a short while.
Natural gas has traded weaker all year, at or around record lows because of oversupply and lack of demand. The dynamics are very similar to oil markets. Last month, the May WTI contract went negative as expiry approached because of a lack of capacity to store the oil.
“For natural gas, I have heard about the possibility of negative prices. I also think it could happen,” Wang was reported as saying. “That’s because natural gas has even more limited storage capacity and its production is also more rigid. So it may happen. But I don’t think it will be a dominant or long-lasting scenario.”
Chart: Nat gas prices are testing the Apr 24th low and briefly plunged below this level, which may open up path to 1.60 again.
Global stocks seek direction, Vodafone dividend maintained
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.
European markets tumble in catchup trade, Trump bashes China
On the plus side, the UK is sketching out how it plans to end the lockdown. On the minus side, it’s going to take a long time to get back to normal. This, in a nutshell, is the problem facing the global economy and it is one reason why equity markets are not finding a straight line back to where they were pre-crisis.
Indices on mainland Europe are catching up with the losses sustained in London and New York today, having been shut Friday. The DAX retreated 3% on the open to take a look again at 10,500, whilst the FTSE 100 extended losses to trade about 20 points lower. Hong Kong turned sharply lower ahead of its GDP report.
Whilst monetary and fiscal stimulus sustained a strong rally through April – the best monthly gain for Wall Street since 1987 – it’s harder to see how it can continue to spur gains for equity markets. Moreover, US-China tensions are resurfacing as a result of the outbreak, which is weighing on sentiment. Donald Trump spoke of a ‘very conclusive’ report on China – the demand for reparations will grow, and trade will suffer as the easiest policy lever for the White House to pull. This is an election year so I’d expect Trump to beat on the Chinese as hard as he can without actually going to war. Trade Wars 2.0 will be worse than the original.
And as I pointed out in yesterday’s note, equity indices are showing signs of a potential reversal with the gravestone doji formations on the weekly candle charts looking ominous.
Warren Buffet doesn’t see anything worth investing in. Berkshire Hathaway has $137bn in cash but the Oracle of Omaha hasn’t found anything attractive, he said on Sunday’s shareholder meeting. His advice: buy an index fund and stop paying for advice.
In FX, today’s slate is rather bare but there are some European manufacturing PMIs likely to print at the low end. The US dollar is finding bid as risk appetite weakens, favouring further downside for major peers. EURUSD retreated further having bounced off the 100-day SMA just above 1.10 to find support around 1.09250. GBPUSD has further pulled away from 1.25 to 1.2460.
Front month WTI retreated further away from $20. CFTC figures show speculative long trades in WTI jumped 35% – the worry is traders are trying to pick this market and the physical market is still not able to catch up with the speculators. The move in speculative positioning and price action raises concerns about volatility in the front month contract heading into the rest of May.
BT Group shares dropped more than 3% on reports it’s looking to cut its dividend this week. Quite frankly they ought to have cut it months ago. I rehash what I said in January: Newish CEO Philip Jansen should have done a kitchen sink job and cut the dividend from the start. The cost of investment in 5G and fibre is crippling, despite the cutbacks and cost savings. Net debt ballooned to more than £18.2bn – up £7.2bn from March 31st 2019. How can BT justify paying over £1bn in dividends when it needs to sort this debt out, get a grip on the pension deficit and do the kind of capex needed for 5G and mass fibre rollout? Given the current environment, a dividend cut seems assured.
What to watch this week
NFP – Friday’s nonfarm payrolls release is likely to be a history-making event. Last month’s -701k didn’t reflect many days of lockdown, so the coming month’s print will be seismic. However, this is backward looking data – we know that in the last initial jobless claims have totalled around 30m in six weeks – the NFP number could be as high as 22m according to forecasts. The unemployment rate will soar to 16-17%. The main focus remains on exiting lockdown and finding a cure.
BOE – The Bank of England may well choose this meeting to expand its QE programme by another £200bn, but equally it may choose to sit it out and simply say that it stands ready to do more etc. The Bank will update forecasts in the latest Monetary Policy Report, with the main focus likely to be on how bad they think Q2 will be. Estimates vary, but NIESR said Thursday the contraction will be 15-25%.
RBA – The Australian dollar is our best risk proxy right now. The collapse in AUDJPY on Thursday back to 68.5 after it failed to break 70 was a proxy for equity market sentiment. We will wait to see whether the Reserve Bank of Australia meeting on Tuesday gives any fresh direction to AUD, however there is not going to be a change in policy.
HSBC & BP absorb the damage, oil plunges again
The S&P 500 rallied to close at its highest since March 10th as investors pin their hopes on states reopening in the coming days and weeks, but we’ve had a less impressive session overnight in Asia. European shares are a bit mixed today on a huge day for corporate earnings which are by and large showing up the huge damage being done to heavyweight stocks from Covid-19 and the collapse in oil prices. The FTSE 100 opened mildly lower but is holding the 5800 level. US futures have weakened along with oil, which is coming under intense selling pressure again.
HSBC joined the growing rank of banks setting aside huge amounts of capital to absorb the expected economic hit from the Covid-19 outbreak. Today’s Q1 update showed a 48% decline in reported profits before tax to $3.2bn as it hiked loan loss provisions to $3bn. It comes after a $3.9bn loss in Q4 2019 due to writing down assets in its investment and commercial banking arms in Europe by $7.3bn. Shares slipped nearly 2% in early trade in London.
There are two main challenges for HSBC. First its pivot to Asia and reliance on earnings out east, at a time when emerging market growth could become very challenged due to Covid-19 and a stronger USD. Second, it’s embarking on a major restructuring designed to slash costs that will inevitably be delayed. Management note today they will be slower to reduce risk weighted assets (RWAs).
Having been made to scrap dividends and buybacks by UK regulators, there was chatter HSBC would think about moving its headquarters out of London and back to Hong Kong. Investors residing in the ex-colony were not impressed, with some launching a legal challenge. HSBC took the strange step of apologising to them today for the loss of income. But while regulators over here may be exceedingly cautious and willing to bash the banks at times, it’s nothing on what awaits if you get within reach of Beijing. Reassessment of the West’s relationship with China after Covid-19 suggests it will be prudent to stick to London.
Elsewhere European banks are in full reporting mode this week. Santander profits were down 82% after setting aside €1.6bn in provisions for losses. UBS profits rose 40% and it seems to less exposed to loan loss provisions than many peers.
BP meanwhile faces a single problem – a collapsing oil market as demand falls and prices plunge. Management reported underlying replacement cost profit for the first quarter of $0.8 billion, compared with $2.4 billion for the same period a year earlier. This, they said, reflected lower prices, demand destruction in the downstream particularly in March, a lower estimated result from Rosneft and a lower contribution from oil trading.
As a result, net debt ballooned by $6bn to $51.4bn leaving gearing at 36.2%. But it’s maintained its dividend – for now. The $10bn acquisition of BHP’s shale assets was not such a smart move. As mentioned before, if BP wants to go green and be ‘carbon neutral’ by 2050, it’s going to require higher oil prices to do it. Oil will pay for the shift away from oil. BP shares slipped 2% in early trade.
Finally, highlighting the extent of the damage in US shale, Weir Group reports today that Q1 Oil & Gas orders were down 34%, and expects capex in North America to be down 50% in 2020.
Oil slumps again
On oil, the front-month (June) WTI contract is coming in for the expected bashing. Prices plunged Monday and have extended losses in Asia after USO said it was dumping its June contracts, about 20% of its holdings. It was inevitable that the front month would again hit the skids as we approach tank tops in the US and producers are too slow to turn off the taps. Increasingly there are also signs floating storage is running out for Brent. There is nothing to stop front month WTI approaching zero again with nowhere to stash the oil. The market will remain in steep contango as traders try to find shelter in future months but this only heaps more and more pressure on the front months.
Having cleared the 50-day simple moving average decisively with yesterday’s close, the S&P 500 is now facing the key resistance around 2885.
WTI has slumped again and continues to make new lows this morning – path to zero is open again.
Oil tumult worries investors as equities retreat
Gyrations and anomalies in the crude oil market grabbed all the attention yesterday, Rightly so, as West Texas Intermediate (WTI) crude – the US benchmark – tumbled into negative territory for the first time ever. Prices plunged at one stage to -$40, before climbing back into positive territory. It was a staggering event.
A few things need to be considered. First this only related to the May contract which was about to expire and had become very illiquid as major trading desks had given up on it several days prior. CME Group data indicated volume of 122k for May contract vs 780k for Jun. Two, the Jun contract remained much firmer, albeit it too was dragged lower towards $20.
You need to bear in mind that Nymex WTI is a physical contract – if you hold it expiration you need to take delivery. Normally as you approach expiration of a futures contract, traders simply roll their positions over to the next month without any fuss. What we saw yesterday was very much a roll over problem – traders holding the May contract couldn’t find any buyers because no one with the ability to take delivery wanted it.
This is because of the collapse in physical demand for crude products like petrol and jet fuel, which means the storage capacity at hubs like Cushing, Oklahoma is near to ‘tank tops’. So, what we got was a severe dislocation as paper traders found they had to offload positions without any liquidity or bid in the market. A unique event, but one that reflects how financial markets can become very dysfunctional very quickly when things go bad.
And whilst it wasn’t a good day for the oil majors, Chevron and Exxon Mobil fell around 4%, hardly the meltdown suggested by the front month implosion. The kind of dislocation witnessed yesterday, however much some may downplay it, points to a fundamental problem in oil markets, namely a lack of storage capacity and demand. But it also shows the market trying to do its job, forcing the price down enough to shut production. The problem is closing down production sites is not that easy and not cheap, so producers are desperately trying to avoid it.
Donald Trump says he will add 75m barrels to the US SPR – always one for a deal. OPEC is said to be looking at cutting oil output immediately, rather than waiting until next month. You should note that Brent is much more stable, albeit still pressured to the downside, as OPEC+ cuts are due to take effect and storage constraints are less pronounced.
WTI – for Jun – was down testing the $20. It’s hard to see how it can hold up against the immense pressure from the lack of storage.
Equities are only 15% from their February all-time highs, but the world seems ‘more than 15% screwed up’. That’s how Howard Marks, the co-founder of Oaktree Capital Management, summed up the current state of the bear market rally whilst talking to CNBC yesterday.
The S&P 500 finished the day lower by 1.8%, with futures pointing lower again today and now under the 50-day moving average. European markets are softer, with the FTSE 100 trading under 5700 but remains in the bullish channel, with support coming in at 5600. The DAX is testing trend support around 10,500.
Germany 30 Cash, 1-Hour Chart, Marketsx – 08.16 UTC+1, April 21st, 2020
In FX, the pound retains its bearish bias with GBPUSD making fresh lows overnight before bouncing back into the horizontal channel that has dominated since last Wednesday. The 1-hr MACD may be about to show a positive move. Price action is anchored on the lower Bollinger band.
GBP/USD, 1-Hour Chart, Marketsx – 08.20 UTC+1, April 21st, 2020
UK unemployment figures were a lot better than expected, with the claimant count change up just 12k vs 170k expected. Unemployment emerged at 4%, up from the 3.9% before while average earnings fell to +2.8% vs 3% previously. There will be a lot of hope that the furlough scheme is working, and the UK government support is enough to prevent an unemployment crisis. But a lot depends on how quick you end the restrictions.