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The Largest Oil Inventory Increase In History

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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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Panic In Chinese Markets Has Commodity Traders On Edge

In honor of Bradley Cooper’s 41st birthday, the crude complex is suffering from a hangover – unable to muster a rally after yesterday’s whipsawing sell-off.

We’ve seen a risk-off stance overnight by broader markets, with Chinese equities finishing slightly lower after Monday’s 7 percent slide and subsequent trading halt. The People’s Bank of China fixed the yuan at a weaker rate versus the dollar, and then intervened to prop up the currency from experiencing further downside. The theme of a stronger U.S. dollar is ingrained for the day, putting concrete boots on a crude rally it would seem.

The below graphic from the EIA highlights how weakness across commodityland™ last year was very much a broad-based phenomenon, driven by dollar strength, weaker emerging market demand and ongoing oversupply across many markets…from crude to copper to corn.

As we move into a new year, the theme of a stronger dollar looks set to be ongoing, although the re-balancing of supply and demand fundamentals seems to be a highly expected theme – or at least, a hope. Related: What Comes After The Commodities Bust?

In terms of our dearly beloved energy commodities, hark, four of the five worst-performing commodities last year were from the crude complex:

After yesterday’s deluge of global manufacturing data, there are just a few tidbits to get our teeth into. Preliminary Eurozone inflation data for December was disappointing, coming in at +0.2 percent YoY, versus an expectation of +0.3 percent. Germany’s unemployment rate remained at 6.3 percent, while both Germany and Spain saw greater job losses than expected. In terms of energy-specific data, we get the weekly API report this afternoon at its usual juncture. Related: Oil Companies Shun South China Sea As Geopolitical Tensions Rise

The spat between Iran and Saudi Arabia continues to rumble on, with Kuwait joining the fray by withdrawing its ambassador to Iran. From our ClipperData perspective, geopolitical tension presents the greatest upside risk to the crude market – at least through the first half of the year.

Heightened geopolitical tension, in combination with a large number of short positions, could provide a swift and sharp bout of short-covering, as we saw last year at time of extremes.

The below graphic shows the final CFTC report of 2015, with hedge funds closing out 8.5% of their short positions to 157,559 contracts – taking profits at the end of the year. Nonetheless, shorts remain elevated – indicative of the current bearish mindset in the market – but also presenting the potential for a short-covering price-pop.

 

Gasoline is once again leading the charge in the crude complex as refinery outages persist, although the start up of the Ozark and Platte pipelines after the flooding of the Mississippi River should help keep a rally in check. Retail gasoline prices have kicked off 2016 in style, remaining under $2/gallon on the national average, while diesel is not too much higher at $2.24/gallon. Related: $1 Billion Copper Mine Deal In The Making Here

Finally, according to data from Russia’s Energy Ministry, crude output for December rose to 10.825 million barrels a day, a new post-Soviet record. Russia’s Energy Minister, Alexander Novak, said late last month that they don’t expect production to drop off this year, as investments made two to three years ago will continue to support output. Natural gas production, however, is declining. As its sphere of influence wanes, natural gas production has fallen in the last year to 635 Bcm (61 Bcf/d), the lowest level since 2009.

 

By Matt Smith

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