Crude oil charging lower as production freeze dismissed

Crude oil charging lower as production freeze dismissed image

Crude oil charging lower as production freeze dismissed

03/14/2016 | Author: Matt Smith

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p33 years to the day after OPEC agreed to cut its oil prices for the first time in its history, and it is still fighting for its piece of the pie (or a piece of the Pi pie…happy Pi day!). Here are eight things to consider on this one-less-hour-of-sleep-last-night Monday morning:

1) The latest CFTC data show hedge funds have closed out their largest number of short positions since at least 2006, as hopes of a market rebalancing is spurring on the closing of bearish bets. Once again, however, we haven’t seen a rash of long positions being opened – only 1,276 contracts – meaning that the biggest increase in net-long positions since last April was overwhelmingly driven by closing of shorts, as opposed to anything mo’ bullish.

cftc oil shorts

2) In terms of economic data overnight, Japanese machinery orders were surprisingly super-strong, up 15% on the prior month in January.  Across to Europe, and Eurozone industrial production came in better than expected, up 2.1% for January versus the prior month – the first increase for three months. Indian inflation data for February came in well below consensus at 5.18% YoY, the lowest level since October. There is nil-nada-nothing on the US economic data front today.

3) We had a couple of key Chinese economic data releases out early on Saturday morning (EST), and my gosh, they were disappointing. Industrial production dropped to +5.4% YoY in January, the worst print since November 2008. Meanwhile, Chinese retail sales showed a gargantuan miss, coming in at +10.2% YoY in January versus a much-higher expectation of +10.8%. This was the lowest reading since last May.

China industrial production China industrial production, % YoY (source: investing.com)

4) While on the topic of China, there is an interesting piece out today highlighting how Angola is using increasingly more of its oil to pay off its debt obligations with China. Angola’s debt to China is estimated to be up to $25 billion, and given falling revenues due to lower oil prices, it is making its debt repayments via black gold, Texas tea. We have seen China enter into a similar agreement with Brazil recently, where it is providing loans in exchange for oil.

Our ClipperData show that Angola exported an average of over 1.7 million barrels per day last year, with China being the overwhelmingly the largest recipient of them, accounting for over 40%:

ClipperData Angola Crude exports

5) As the market tries to weigh up whether we have seen the bottom in oil prices, it is important to remember that recent upside hasn’t just been limited to crude. We have been seeing a broad rise across commodityland™, amid a common theme: that oversupply in markets from copper to cocoa to crude is in the process of rebalancing. From today’s WSJ:
commodities WSJ

6) The recent commodity rally has also been in conjunction with a rebound in risk appetite, ergo, rising global equity markets and rallying emerging market currencies. As we discussed on Friday, increasing purchasing power from emerging markets due to stronger currencies has aided a rebound in commodities. An unwinding of this trend would likely lead to lower commodity prices once more.
em currencies

7) The chart below is from this research piece, which draws comparisons betwixt current Indian oil demand and China in the late 1990s. The conclusion of the piece is that India could well be in the process of surpassing China as the leading source of oil demand growth going forward, driven by a relatively stronger economy, as well as rising vehicle sales.

India, China demand

8) Finally, oil prices are charging lower today on news that Iran will not take part in a production freeze – well at least not until its production returns to 4 million barrels per day.


About The Author

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Matt is a Director of Commodity Research at ClipperData. Matt specializes in extracting key themes from technical and fundamental analysis of the global energy market, and communicating these through daily and weekly deliverables. He also provides oil and natural gas analysis and commentary to national and international media outlets that include CNBC, Fox Business, Russia 24, the Wall Street Journal, MarketWatch, AFP, Bloomberg, Reuters, and the Oil Daily. Prior to joining ClipperData, he worked for eight years at Schneider Electric / Summit Energy as a Global Commodity Analyst, where he also founded and authored the blog, Energy Burrito. He started his career at the Royal Bank of Canada in the UK, spending eight years with the bank. During that time, he managed $55 million in assets as a portfolio manager and financial analyst.