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Appreciating Dollar Caps Crude Rally Again

Offshore Oil Rig

And it’s an exciting end to an eventful week in the oil market on this Friday the 13th. In fitting fashion, crude was screaming lower earlier, chased off by a stronger dollar (apparently in a hockey mask), before positive economic data has helped improve the mood a bit in the U.S. OPEC’s monthly report has had something for both the bulls and the bears; hark, here are six things to consider in oil markets today:

1) On the economic data front, we have had a few bits and bobs from Europe; Eurozone economic growth in Q1 was revised slightly lower to +0.5 percent QoQ, up 1.5 percent YoY, while year-on-year inflation continues to be conspicuous by its absence across Germany, Italy and Spain.

On to the U.S., and a lack of inflationary pressures are apparent too, as producer prices are flat year-on-year (below consensus, but +0.2 percent for April). Retail sales, however, blew the doors off expectations with the best monthly rise since March of last year; the rise was led by autos, gas stations (all paths lead back to energy) and online retailers.

2) There is an interesting piece in the Wall Street Journal today which suggests that the stock out-performance of natural gas producers indicates that the darkest days for natural gas may well be behind us.

Even though oversupply in the U.S. natural gas market is exemplified by storage at a 44 percent surplus to both last year’s level and the five-year average, tightening fundamentals going forward are expected to bring the market closer to balance. Expectations are for U.S. production to finally start falling, in no small part due to lower U.S. oil production and the associated gas that comes from shale plays, while a La Nina weather formation later in the year is set to boost natural gas demand.

However, one man’s meat is another man’s poison. While the Canadian wildfires may have been bullish for oil prices due to significant production losses, but they have been meaningfully bearish for natural gas. Natural gas is a key input to Canadian oil sands production, hence a drop in oil output is leading to natural gas demand losses ~of 0.5 Bcf/d. Related: The Russia-China Energy Marriage And The Multipolar World

Nonetheless, prices, rigs and share prices appear to have bottomed out for natty:

(Click to enlarge)

3) OPEC has completed our trio of key monthly reports today, and similar to the IEA, has kept its demand growth expectations steady for 2016 at +1.2 million barrels per day (while the EIA ratcheted up theirs to +1.4 million bpd). Related: Libya’s Oil Exports Could To Go To 0 bpd Within One Month

The cartel has adjusted non-OPEC supply lower again for this year, expecting it to fall 740,000 bpd, as $290 billion of capex cuts are made. As the chart below illustrates, the largest drop in supply is expected to come from the U.S., while declines are also expected from China, Mexico, U.K., Kazakhstan and Colombia.

(Click to enlarge)

4) The OPEC report also highlights how Canadian demand for West African crude has been on the increase (page 9), as imports continue to be competitive with domestic grades. We see from our ClipperData that imports in March reached the highest level since our records began, over double the average volume seen arriving in 2015:

 

(Click to enlarge)

5) Not wanting to keep harping on about India, but OPEC’s report once again highlights the broad-based demand strength we’re seeing coming through from the Asian nation. Demand growth was up 600,000 bpd YoY for March, some 15 percent higher. Related: Wave Of Violence Causes Nigerian Oil Output To Fall To 20 Year Lows

This meant consumption increased to 4.56mn bpd, the second highest level ever recorded. Gasoline, which accounts for 13 percent of consumption, was up 21 percent YoY, while diesel, which accounts for 36 percent of oil consumption, was up 15 percent YoY. LPG demand, which is 16 percent of consumption, rose 14 percent YoY. Solid.

(Click to enlarge)

6) Finally, in terms of OPEC production for April, it was up 188,000 bpd. Iran led the increases, with production rising 198,200 bpd to 3.45 million bpd. Iraq saw production increase by 154,000 bpd, while Kuwait and Nigeria saw the biggest losses, with drops of 132,000 bpd and 56,800 bpd, respectively.

By Matt Smith

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