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Oil Reverses As Stronger Dollar Offsets Canadian Concerns

oil train

Two hundred and thirty-one years after Joseph Bramah patented the beer-pump handle, and the oil market is looking a little frothy once more. Canadian wildfires continue to stoke supply concerns, while the appointment of a new Saudi oil minister has produced a whole host of conclusions. Hark, here are five things to consider relating to oil markets today:

1) While much uncertainty surrounds the Canadian wildfires, we do know there has been little damage to oil infrastructure in the region (only one site, CNOOC’s Nexen operations, has reported minor damage). Suncor, a key player in the Alberta oil sands with ~700,000 bpd currently offline, put out a news release yesterday evening, saying ‘there has been no damage to Suncor’s assets. Suncor is beginning to implement its plan for a return to operations’.

To be sure, the loss of ~1 million barrels per day of production will have a big impact on flows in North America in the coming weeks, even if production starts to return. But as the worst of the disaster appears to be over in the oil-producing area, bullishness is abating.

2) From a policy standpoint, there isn’t much to be made of the appointment of a new Saudi oil minister. As I said on CNBC Asia last night, Ali al-Naimi is over 80 years-old and was always due to retire at some point. Should his successor, Khaled al-Falih, be removed in short order over the next year or so, we would be concerned; otherwise, this appears a natural ‘changing of the guard’. It would appear, however, that the influence and prominence of deputy crown Prince Mohammed bin Salman continues to grow.

3) The latest bout of Chinese trade data has once again illustrated the duplicitous nature of Chinese news flow. Imports dropped by 10.9 percent YoY in April, worse than the -5 percent expected, and falling for the 18th consecutive month (eek, wow). Exports dropped again after a brief blip higher last month, falling 1.8 percent. Chinese exports to the U.S. (its largest market) fell by 9.3 percent, while EU exports rose 3.2 percent. Related: As Oil Markets Tighten, Geopolitical Events Matter Again

Offsetting this weak data has been Chinese oil imports, which rose 7.6 percent YoY in April, according to customs data. As we have been highlighting via our ClipperData, Chinese waterborne imports have been amazingly strong this year; in April we saw waterborne imports up 14 percent YoY, as teapot refiners pull in increasing volumes.

Qingdao is the port in Northern China where teapot refiners are pulling in the most crude. As our ClipperData illustrates, flows into Qingdao reached a record in March, up some 90 percent on year-ago volumes:

4) Once again we pilfer the chart below from the mighty @JKempEnergy. The latest CFTC data illustrate that net long positions have once again shuffled away from one-year highs, as long positions were closed out. Related: Self-Driving Vehicles May Be Closer Than You Think

This second consecutive drop in net long positions highlights that hedge funds are taking profits after the recent ramp up in prices. The same scenario has played out in the latest ICE data for Brent, with net-longs cut by 8 percent.

(Click to enlarge)

5) Finally, the chart below illustrates how a weaker U.S. dollar has breathed life into risk-on assets so far this year. As the US dollar has reached a one-year low versus a basket of currencies, crude oil is not the only commodity to be propelled higher. Related: Low Oil Prices Hitting Real Estate in UAE

Broad-based price appreciation has been seen across commodityland™, while emerging market equities have also been filled with renewed gusto. However, just as we are seeing today, a return to strength in the U.S. dollar quickly flips the fortunes of these assets.



By Matt Smith

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