Suckerpinch, suckerpunch, for the first day of the month. We kick off September carrying the baggage that we picked up last month – that of economic fears ignited by China. Overnight PMI numbers from the world’s largest energy consumer (and second largest economy) has done little (well, nothing) to dissuade this notion. The official PMI manufacturing print came in line with consensus but showed contraction for the first time since March. Meanwhile, the Chinese manufacturing number from Caixin was just above consensus, but at a six-year low nonetheless.
Concerns about China’s economy has been further stoked by a huge drop in exports out of South Korea. August exports showed their sharpest fall in six years as shipments to China slumped by 8.8% on the prior year; China is its largest export destination, accounting for a quarter of South Korea’s exports.
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Weaker imports into China are a theme we are well aware of here at the good ship Clipper; August Chinese oil imports have dropped off considerably after being strong year-over-year for much of 2015: Related: Mexico Sweetens The Deal In Offshore Lease Auction
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Moving from Asia to Europe, manufacturing data came in below consensus for both Italy and France, dragging the Eurozone print on the aggregate below expectations – despite the best efforts of Germany and a decent print from them.
A bulletin from OPEC yesterday was seemingly misinterpreted by the market. While some considered that it highlighted a change in stance by the cartel to consider a coordinated cut with both OPEC and non-OPEC members, the reality is that if OPEC itself cannot reach a consensus within its own confines, it would appear nigh on impossible to do so if it included more countries in the process. Related: Did The Fed Intentionally Spark A Commodity Sell-off?
We discussed the EIA’s revised production estimates yesterday; the key takeaway is that although the EIA may have revised production down to 9.3 million barrels per day (from May’s revised level of 9.4mn bpd), this has only brought them closer in line with what we are hearing from US producers: production peaked in the first half of the year:
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Finally, the below chart highlights how stretched short positions became last week by hedge funds prior to the oil price snap-back. According to Reuter’s John Kemp, ‘money managers held short futures and options positions in the main U.S. crude equivalent to 157 million barrels of oil at the end of trading on Tuesday, August 25, two days before the rally‘. Short positions were three times greater than they had been two months previously: Related: OPEC Divorce And Self-Destruction Thanks To Saudi Oil Strategy?
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Matt Smith
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While June production reported by EIA was down 100,000 from a revised May, it was down 300,000 from the peak previously estimated by EIA for March and April. Further, June was actually lower than December 2014, as estimated by EIA.
The average reduction in production estimates amounts to about 100,000 per month, or about 18 million barrels removed from production estimates for the first half of the year.
The June estimates should also change the base line for coming weekly estimates - if the EIA's outlook still holds and July and August saw reductions of 100,000 each month, then production should be somewhere around 9.1 now, trending towards 8.7 million barrels a day by December - that's a significant change in most expectations.