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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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Oil Heads Lower Over Bearish IEA Report

Thirty-four years after Muhammad Ali fought his last fight, the crude complex is on the canvas once more. Today’s knockout blow comes courtesy of the IEA’s monthly oil market report, and its expectation that the global market will remain oversupplied through at least the end of next year.

It projects demand growth to slow next year to 1.2 million barrels per day, down from 1.8 million bpd this year. Nonetheless, as Iran leads OPEC production higher, a global imbalance is expected to persist.

Non-OPEC production is set to drop by 600,000 bpd, a dramatic turnaround from the surge of 2.4 million bpd of production growth seen in 2014. U.S. crude production leads the charge lower on this front, falling by 415,000 bpd. As non-OPEC production slows, OPEC is seeing its market share rise once more:

(Click to enlarge)

Related: Tick Tock: Time Running Out for Struggling Oil and Gas Drillers

In terms of economic data flow, German inflation was whoop-bang in line with consensus at +0.4% YoY, while Italian industrial production was better than expected at +2.9% YoY. The heavyweight champion of data-points today, however, has come through from Indian industrial production in October. It was up 9.8% YoY, a country mile away from the consensus of 7.8%, and the highest level since October 2010:

India Industrial Production, % YoY (source: investing.com)

Compelling news has come out of China regarding its pursuit of a strategic petroleum reserve. According to its National Bureau of Statistics, it more than doubled the size of its strategic crude oil reserves between November 2014 and the middle of this year. Stockpiles reached 190 million barrels in mid-this year, while it targets 550 million barrels by 2020. Related: Why Texans Might Soon Be Driving On Mexican Gasoline

190 million barrels is the equivalent of one month’s cover of Chinese net crude imports. Members of IEA, such as the U.S., are obligated to keep at least 90 days of import coverage. Given higher production in recent years – resulting in lesser net imports – the US is well above the required level, at ~156 days of cover in inventories.

From one clobbered commodity to another, and US natural gas has seen the January contract drop below $2/MMBtu, as production remains strong, storage remains elevated compared to historical benchmarks, and the warm start to winter continues. The 8-14 day outlook shows above-normal temperatures dominating the eastern half of the U.S., taking us through to Christmas Eve. It’s crazy to consider that in the coming days we will likely see both natural gas prices and retail gasoline prices on the national average both below $2. Related: The Pain Game – How Low Can Oil Prices Go?

Finally, the below graphic is from the WSJ, making the case that consumer spending has been lumpy in response to lower gasoline prices, with car and home sales up, but inflation-adjusted spending at retailers sluggish since mid-year. This leaves the U.S. caught betwixt low energy prices which should well boost economic expansion…while global economic weakness and a stronger dollar provide headwinds.


By Matt Smith

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