Dollar strength crushes crude

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As the U.S. dollar pushes on to the highest level in a year, crude is correspondingly getting crushed today. While some may suspect the oil sell-off is due to a lack of confidence in an OPEC production cut at the end of the month, the reality is that the gale-force headwinds provided by a super-strong dollar are too much to take. Hark, here are five things to consider in oil markets today:

1) While dollar strength explains today’s sell-off, the chart below presents a simple but solid argument for the weakness in crude over the last two years: rising OPEC production.

And despite the OPEC meeting looming (hark, two weeks and counting down), OPEC producers are continuing to put a record amount of oil onto the market. As we discussed on Friday, Iranian exports have clambered above 3 million barrels per day for the first time since sanctions were lifted – although we suggest this could be driven by floating storage being drawn down as much as it is by increasing output. 

That said, Iranian President Hassan Rouhani formally opened the West Karoun oil fields over the weekend, which are said to have swiftly increased production to 250,000 bpd. Rouhani also expressed oil production west of Karoun must reach one million barrels per day. Doesn’t sound like Iran is cutting any time soon. 

oil versus opec production.jpg

2) While much is being made of record production and exports from OPEC, it should also be noted that deliveries to Asia are also at a record pace. 

waterborne oil exports to Asia ClipperData.jpg

3) Bearishness has shown up with a vengeance in financial positioning. The latest ICE data show that hedge funds cut their net long positions by 80 million barrels to 266mn bbls last week, with long positions shrinking 24mn bbls, and shorts increasing by 56mn bbls. CFTC data has been delayed due to Veterans’ Day. 

Brent net longs Nov.jpg

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4) The graphic below is from a WSJ piece today which highlights that although electric vehicles are growing, they will still account for less than 1 percent of the 83 million total light vehicle sales expected this year. 

Progress is lumpy, however. While the U.S., China and Europe are seeing strong investment, Japan has slashed its targets for electric vehicles and charging stations in half – to one million of each by 2020.      

electric vehicles.jpg

5) Finally, there were a number of October releases out of China overnight; retail sales were the most disappointing, coming in at 10.0 percent, well adrift of the consensus +10.7 percent YoY. Industrial production was also below consensus, coming in at +6.1 percent (versus 6.2 percent expected). Completing the trifecta of data, fixed asset investment actually came in above consensus at 8.3 percent YoY (versus +8.2 percent).  

In addition to these datapoints, the National Bureau of Statistics pegged Chinese domestic production for October at 3.78mn bpd, the lowest since May 2009, and down from 3.89mn bpd in September.