As opposed to the usual free-form structure, let’s do some painting by numbers to color in the backdrop for today’s market currents. Henceforth, five observations ahoy:
1) There is an interesting piece out this morning addressing the dichotomy seen within US shale producers, as some chose to hedge fairly aggressively in Q2, while some chose not to at all. While a similar volume of oil was hedged by the 30 largest publicly-listed producers at the end of Q2 as there was in Q1, 366 million barrels, some simply missed the opportunity to hedge at higher prices, and are less inclined to at these volumes. Related: “Supersize” Fracking Could Keep Natural Gas Prices Low For Years
The lack of hedging may also keep any rally along the futures curve reined in, as producers take the opportunity to hedge future production should prices rally at the longer end.
2) There has been a bunch of economic releases out overnight from Europe. Continued resilience in German data, in combo with Italy and Spain, has lifted both Eurozone PMI services data and the composite (services + manufacturing) above both its consensus and last month’s level.
The composite is now at a four-year high, despite continued weakness from France. The services print for France hit a five-month low, while unemployment remained at 10.3%. UK services also underperformed, showing its weakest print since May 2013.
3) While many countries are hurting due to the drop in the oil prices, Russia is being one of the worst hit. The IMF predicted in July that its economy would shrink by 3.4% this year, and these expectations have only been ratcheted lower given the recent return to lower oil prices.
As the below graphic succinctly highlights, a significant dependence on the oil and gas industry has meant that lower prices have hurt the ruble, and ultimately, its economy. It is seeing the worst economic performance of any emerging market.
Revenues from oil, gas, coal, minerals and forest products (minus their production costs) account for 18% of Russia’s economy: Related: Why Did Oil Prices Just Jump By 27 Percent In 3 Days?
(Click to enlarge)
4) Russia’s economic situation is also seeing a detrimental impact from the slowing economic environment in China. After all, Russia is one of China’s key suppliers across the energy spectrum. Even though Chinese natural gas demand grew at 5.6% last year, it still dropped below that of economic growth for the first time in a decade – despite a concerted effort by China to increasingly focus on natural gas as a substitution fuel for dirtier coal. This year, through July, natural gas demand growth is even slower, at 2.3%.
According to Chinese customs data, Russia sent 930,000 barrels per day of oil exports to China in the first seven months of the year, making it China’s second largest supplier, surpassing Angola. According to #ClipperData, a quarter of these flows – or 233,000 barrels per day – were waterborne deliveries, while the rest were by pipeline. Waterborne deliveries to China continue apace from Russia recently. #ClipperData show that just yesterday two cargoes totaling 1.5 million barrels arrived in the Chinese ports of Huizhou and Dalian. Related: Why Now Is The Time For Investors To Pick Up Positions In NatGas
(Click to enlarge)
5) Ahead of the big bad daddy of employment reports tomorrow, nonfarm payrolls, we have seen weekly jobless claims in the US climb to a two-month high at 282k. This was worse than both the consensus of 275k, and last week’s revised 270k. The euro is getting pummeled as the European Central Bank President Draghi discusses ongoing weakness in the Eurozone in his post-interest rate decision conference (Eurozone rates left at 0.05%). This currency move is providing headwinds for a crude move higher today, and amid listless market moves (and China closed for two days, phew), oil is looking subdued for now.
By Matt Smith
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