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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Bullish Bets On Oil Up But Market Stalemate Remains

Despite dark clouds hanging over the commodity complex, crude prices are rebounding thus far after yesterday’s clobbering. We have had quite the data deluge overnight, led by a late-month flood of numbers from Europe. The Business and Consumer Survey, a measure of confidence in the Eurozone, is likely of the most importance, while inflation data out of Spain and Germany has come in below expectations – stoking deflationary fears once more.

In terms of the Business and Consumer Survey, it has reached the highest level since April 2011, as broad-based signs of economic improvement across the Eurozone underscores the region’s ability to have dealt with the Greek debt crisis (for now), and prior to that, the Eurozone debt crisis as a whole:

EurozoneBizConsumerSurvey

Eurozone Business and Consumer Survey (source: investing.com) Related: Support For OPEC Production Cut Is Increasing

News from India overnight has arguably provided the most positive boost to markets amid the current armageddon-esque ‘commodity rout’ rumors. The Reserve Bank of India cut interest rates by 0.5 percent to a four-and-a-half year low of 6.75 percent, with a lower inflationary environment given as the justification for the larger-than-expected cut (only 0.25 percent was expected). This is the fourth cut this year.

As we know all too well, all paths lead back to energy (and commodities generally) – hence falling energy prices have been a key driving force behind lower Indian inflation, and ergo, the interest rate cut. Economic growth in India came in at 7 percent for Q2 – slower than expected, but still strong. In terms of oil consumption, India is expected to consume ~3.9 million barrels per day in 2015 (h/t IEA), putting it neck-and neck with Japan as the third largest oil consumer in the world (before surpassing them next year).

IndiaInterestRates

India Interest Rates (source: investing.com)

Next up, the below graphic helps to sum up some of the key elements in the current crude complex. While U.S. production is finally showing an entrenched downward trend, ongoing staunch supply from OPEC is more than offsetting this. All the while, bullish bets on crude are increasing after the recent snap-back in prices from retesting the lows earlier in the year.

Hence we find ourselves in a highly volatile day-to-day price environment, as prices are unwilling to push too much higher given the backdrop of oversupply, but are unwilling to push too much lower given an ongoing narrowing of the imbalance amid strong demand. Related: Germany Now Faced With Thousands Of Aging Wind Farms

Overwhelmed

Finally, despite the forecast that the U.S. Arctic may hold enough oil to meet three years of U.S. oil demand, Royal Dutch Shell has abandoned its exploration efforts offshore Alaska. Although projections point to 25 billion barrels of oil in Alaskan waters – a comparable volume to the Bakken shale play – current prices make exploration of this geographic area uneconomic, and will likely do so until they rise considerably higher from current levels. Related: With Shell’s Failure, U.S. Arctic Drilling Is Dead

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By Matt Smith

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