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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 Up As Saudis Mull Production Freeze Without Iran

It is Eric Estrada’s 67th birthday, and accordingly, key oil producers are once again looking to police the oil market, reviving hopes of a production freeze. Combine this with the weekly inventory report and a Federal Reserve meeting, and all CHiPs are being placed on a rally today. Hark, here are five things to consider:

1) Ahoy there, mateys. A piece in the WSJ today focuses on the global tanker market, and how low oil prices and rising production have lifted tanker rates and fueled a boom in the sector. But as the chart below illustrates, 200 new tankers are expected to come to market by 2017, with 40 percent of these being VLCCs (holding ~2 million barrels) and a third being Suezmaxes (holding ~1 million barrels). This, in combination with expected higher prices and tighter supply in the future, could pressure tanker rates lower in the coming years. Related: IEA Sees “Light At The End Of The Tunnel” For Oil Markets

(Click to enlarge)

Yet while the piece suggests that the average tanker has cut its speed by 10 percent on average in recent months to reduce downtime, it seems from a ClipperData perspective that this is more an attempt to slow down the onslaught of crude arrivals to congested ports, as global inventories swell to record levels.

2) We have weekly EIA inventories on deck today, with a seasonal build expected for crude, draws to the products. This formation will likely be repeated through March and much of April, as we shuffle through refinery maintenance and a destocking of winter blend gasoline.

Last night’s API report yielded a 1.5 million barrel build to crude stocks, a 1.2 million barrel draw to gasoline, setting the scene for today’s EIA report. As mentioned yesterday, a lesser build than expected is in the cards today as the build-up of floating storage off the U.S. Gulf continues to struggle to find its way onshore.

3) Today delivers one more twist in the tale of the production freeze saga, leaving the market to wonder ‘will-they-won’t-they’ for another month, as a meeting between 15 OPEC and non-OPEC producers is planned for April 17 in Doha. These 15 producers account for ~73 percent of global output. Related: Iran Aims For Highest Oil Production Since 2008

However, as the chart below so starkly illustrates, even if we were to see a production freeze agreed upon, rising output from Iran and Brazil would still more than offset these losses:

(Click to enlarge)

4) We’ve had a few bits and bobs of data out overnight. UK unemployment remained at a 10-year low of 5.1 percent, while the employment rate rose to 74.1 percent the highest level since records began in 1971. Things have been quiet most everywhere else except for the U.S., where we have had inflation data, industrial production, and a sprinkle of housing releases. Related: Solar Power Is About To Get MUCH Cheaper

Industrial production was poor, dropping 0.5 percent MoM. Building permits shrank more than expected in February, falling 3.1 percent MoM, while housing starts came in better at +5.2 percent MoM. As for headline inflation, it dropped in February versus the prior month (and just as we saw yesterday with retail sales, all paths lead back to energy…). Stripping out food and energy, the core number rose 0.3 percent MoM, or 2.3 percent on the year prior – the biggest increase since mid-2012:

(Click to enlarge)

Core inflation, YoY (source: investing.com)

5) We get the Federal Reserve’s latest interest rate decision this afternoon. While a rate hike is not expected, market gyrations in response to Fed rhetoric will filter through to the crude market; boosted expectations of future rate hikes would rally the U.S. dollar, providing headwinds to oil.

By Matt Smith

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