On SuperChef Nigella Lawson’s 56th birthday, the crude complex has all the ingredients for a rampant sell-off. Despite the ongoing tension in the Middle East, oil prices are selling off to 11-year lows ahead of today’s impending bearish weekly inventory report – while the ongoing bout of a risk-off rout means the U.S. dollar is a safe-haven for cash, clobbering commodities that little bit more.
Last night’s thunder-stealer, the API report, yielded a bullish 5.6 million barrel draw for crude stocks. Nonetheless, this drop was more than offset by humongous builds to the products (distillates = +5.6 million barrels, gasoline +7.1 million barrels). As we discussed here on Monday, the flooding of the Mississippi River and its subsequent impact on pipelines likely meant more crude was stranded at Cushing; last night’s +1.4 million barrels build affirmed this to be true.
The theme of geopolitical tension is not only present via deteriorating Saudi-Iran relations, but tension is also escalating in Libya, where oil storage tanks at the country’s biggest oil port in Es Sider have been set on fire in recent days by Islamic State militants, as well as at nearby Ras Lanuf. If we didn’t have the double whammy of sky-high global inventories and such a rampant daily pace of oversupply, this event would otherwise have lit a fire under crude prices this week – as would have Saudi-Iranian tensions. Related: Fueling Star Wars’ Robots, What Powers The Droids?
In terms of economic data flow, things continue to go from bad to worse in China, as the Caixin services PMI came in a country mile away from consensus at 50.2 (hark, the lowest level since last March). This illustrates that economic weakness is increasingly rippling across the Chinese economy to the consumer – an area last year where we saw so much strength.
On to Europe, and the Eurozone services PMI print came in better than expected – boosted by Germany, Italy – but held back by France and Spain (exactly what we saw from the manufacturing data two days ago). Here in the U.S., another thunder-stealer – this time from Nonfarm Payrolls – the ADP report, showed a blowout number of jobs created last month (257k versus 192k expected – the highest since last February). This bodes well for the aforementioned Nonfarm Friday.
The chart below is a nifty representation of the pain that is being felt by Saudi Arabia’s finances from the oil price drop. For nearly thirty years it has pegged its currency at 3.75 riyals to the U.S. dollar, to bring a level of stability to its finances (n.b., 90 percent of government revenue is from oil). But as oil prices continue to fall, the pegged riyal means the kingdom continues to lose money hand-over-fist.
Top prop up the currency, Saudi is spending its foreign currency reserves; these have now fallen from $746 billion in August 2014 to $635 billion in November. Nonetheless, the 12-month forward contract for the riyal continues to price in devaluation, surging to its weakest level in 16 years. Related: What Comes After The Commodities Bust?
While everyone is getting excited about the lifting of the U.S. crude export ban, U.S. waterborne imports into the Gulf Coast (aka PADD3) have risen for the past three months to their highest level in 2015.
Our ClipperData show that crude imports from the Persian Gulf – Iraq, Kuwait, and Saudi Arabia – have increased by 67 percent from the low for the year in August to their highest level for 2015 in December at 1.36 million barrels per day. This ramp up has been led by Iraqi imports, which have increased seven-fold from August’s paltry low of 65,000 bpd to December’s imports of over 460,000 bpd. Related: Saudi-Iran Dispute Won’t Cause Lasting Oil Price Rally
Saudi Aramco has just announced that its OSPs for February are unchanged to the US, while it is increasing the discount for its light crude by $0.60 a barrel into Northwest Europe and by $0.20 a barrel in the Mediterranean. As for Asia, it narrowed the discount for its Arab Light crude by 60 cents a barrel to 80 cents below the regional benchmark, given this leeway as Asian refining margins remain strong.
Persian Gulf crude imports to PADD3 (source: ClipperData)
By Matt Smith
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