One hundred and thirty-seven years after the first mobile home was used (in a journey from London to Cyprus….yep, it was horse-drawn), and crude is on the move once again. With news overnight that an oil strike in Kuwait has ended, combined with expectations of a solid build to crude stocks today from the weekly inventory report, crude is now trekking lower. Hark, here are five things to consider relating to energy today.
1) In terms of economic data, we’ve had trade numbers out of Japan overnight. While both imports and exports were down year-on-year, both were better than expected. Given the steep drop in imports, the Japanese trade balance has reached a surplus not seen since 2010.
Exports are being hurt in recent months by the strengthening yen, while lest we forget….all paths lead back to energy: as crude oil prices drop, Japanese import costs have fallen for 15 consecutive months.
Not only are lower oil prices cutting import costs on a year-over-year basis, but an aging and shrinking population – in combination with increasing fuel efficiency and a lothargic economy – is meaning Japanese crude demand is in structural decline.
Japan imports virtually all of its oil needs. According to our ClipperData, imports are down year-over-year for nine out of the last twelve months, with total crude imports down a total of 3.5 percent for this period. Related: ISIS Tries To Sow Chaos In Libya To Scare Oil Workers Away
This downward trajectory, in combination with growing oil demand growth from India, means Japan has been leapfrogged in terms of being both the third largest consumer and importer in the world.
2) Elsewhere in economicdataland™, we’ve had German producer prices showing deflationary forces are alive and well, while Brazilian inflation remains em chamas, up 9.34 percent YoY, and not a million miles away from 12-year highs. Related: Forget Doha. The Fundamentals Are Moving In The Right Direction
3) We’ve got the weekly EIA inventory report on deck this morning. Consensus is for a ~2.4 million barrel build to crude stocks, while last night’s API report yielded a 3.1 million barrel build. Given refinery issues last week and firm waterborne imports, these expectations are unlikely to be disappointed. Draws are expected to the products, as well as a minor one at Cushing.
4) After the first cargo of U.S. LNG exports left Cheniere’s Sabine Pass in February, we can see in our ClipperData that Europe is set to receive its first cargo. The destinations for the first few LNG cargoes loaded thus far have been wide-ranging; while the first cargo headed to Brazil, we have seen others heading to UAE and India, and now Europe joins this list.
5) Finally, revisiting the theme of ‘all paths lead back to energy’, the chart below raises an important point regarding the recent relationship betwixt equities and oil. As you may recall, equities had a horrific start to the year before bottoming out in late January; this was just around the same time that oil prices reached 12-year lows. Related: A Lasting Solution To Low Oil Prices
As expectations of impending Fed interest rate hikes wane (read: never-gonna-happen-in-June), the U.S. dollar has softened, the Dow Jones Industrial Average is back over 18,000, the S&P500 is back above 2,100…and crude is back in forty-dollardom.
Hence, if you believe that equities are due a correction from here, then surely you have to believe the same for oil – or vice versa. Chinese equity markets have headed lower in recent days…crude and other global equity benchmarks could be heading the same way:
(Click to enlarge)
By Matt Smith
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