So the crude market has become something of a standing joke at this point.
“Rebalancing” is always just around the corner. Until the next API/EIA print.
“[Fill in your favorite OPEC member] is ready to support an extension of the production cuts.” Until tomorrow’s headline refutes today’s news.
And on, and on.
Reality finally sunk in in early March (during CERAweek no less) and things briefly went to shit, but since then, the potent one-two punch of warmongering and a Tuesday lunchtime Riyadh tape bomb helped crude to its longest winning streak since December – right up until today’s EIA draw (2.16m bbl, so a bigger draw than estimates) was overshadowed by rising production and a record stockpile at Cushing.
“The net result is another moderately bearish set of data, based on price reaction,” Bloomberg oil strategist Julian Lee wrote, which is amusing because… well… because “yes”, when prices fall it’s safe to say that the interpretation was bearish. That’s tautological.
Anyway, here are some useful bullets for those interested.
- Domestic crude production rose for 8th week to 9.235m b/d; in past 4 weeks production has advanced by 126k
- Cushing crude inventories rose to record 69.42m bbl
- Those 2 factors overwhelmed 4th straight increase in refinery crude runs, which helped drive fall in nationwide crude inventories, down 2.166m bbl. Only 2nd week this year that stockpile has fallen
- Distillate inventories continued steep fall seen since early February, with 4-week avg demand at more than 2-year high.
Through it all, the Street has remained bullish. I think that’s a pretty fair assessment to make although I’m sure someone at some desk somewhere may be a lonely bear.
Just this morning for instance we got Goldman reiterating their Overweight on commodities (see here for more).
Well, you can (still) count BofAML among the “long and strong” crowd because on Wednesday the bank is out calling for $70 Brent by the “end of June” based on what I can only describe as a convoluted thesis involving everything from US fiscal policy failures to the French elections to China to Mexico.
Fair warning: some of this reads like the bank isn’t looking at the same data I am (note the part about “an actual US shale production recovery has yet to arrive”) but the bits about the dollar/crude correlation are worth a read…
The collapse in oil prices likely helped fuel a dollar rally… Commodities and FX have gone hand in hand for decades and maintain a complicated relationship. While the DXY rallied as oil prices collapsed from 3Q14 to 1Q16, oil/dollar correlations have broken down in recent months. Stronger US growth expectations have met rising global inflation, deep OPEC cuts, and a steady CNY. While a strong dollar backdrop has not been particularly supportive of higher oil prices, micro fundamentals have improved. Global oil demand is expanding, an actual US shale production recovery has yet to arrive, and crude production cuts across OPEC and non-OPEC have exceeded 1.4 million b/d. As a result, we believe global oil inventories should soon decline.
…but oil/dollar correlations have broken down as of late Importantly, we believe dollar strength could start to reverse if French election risks dissipate and the US continues to hit policy constraints. For instance, a grand bargain between Congress and the White House that leads to a sizeable US government deficit and much higher US rates now looks increasingly unlikely. This sentiment shift in US macro may not be a bad thing for oil. After all, petroleum product demand is driven by emerging economies, where prospects are improving. While China has opted to use its huge domestic savings surplus to stimulate growth, the MXN has appreciated to reflect reduced trade risks. Global early cyclical indicators also remain rather strong, particularly in Europe.
Yet, any EUR appreciation could be bullish for oil prices In the US, Republican leadership seems to be moving away from radical to mainstream policy. In particular, a move from Border Adjustment to Value Added Tax should temper dollar strength, particularly if budget neutrality is maintained. A goldilocks scenario for global growth could emerge. It would entail modestly stronger US growth, stable US rates, and a cyclical upturn in Europe and a broad range of Emerging economies. The French election could thus mark a turning point. Should a synchronous recovery take hold, we believe dollar weakness would be bullish for USD oil prices. While micro supply/demand fundamental oil balances still point to higher oil this summer, oil could soon sing “Vive la France”. We retain our $70/bbl end-of-June target for Brent.