Market Currents – August 12, 2015

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Alrightee, folks; let’s get the overnight Chinese capers out of the way before we move on to the good stuff. China re-set its currency peg for a second consecutive day, essentially a mechanism to devalue its currency. Although financial markets are freaking out, the IMF has chimed in to try and look on the bright side, saying it is ‘a welcome step as it should allow market forces to have a greater role in determining the exchange rate‘.

In addition to the currency devaluation, Chinese economic data did little to spread a zen-like calm across markets, as industrial production printed a whopper of a miss at +6.0% versus +6.6% expected (and +6.8% last month). This is just above the low of April, which in itself is the worst level in seven and a half years. The best that could be said for this data point  is that it made the minor miss from retail sales look insignificant. Retail sales grew at 10.5%, versus consensus for 10.6%.

China industrial production Chinese Industrial Production (%, YoY)

Once again, US economic data is conspicuous by its absence, leaving us to focus purely on the good stuff (aka, oil-specific data). We have the weekly EIA inventory report on deck this morning, with a draw in the realm of 2 million barrels expected for crude, with a lesser draw to gasoline, and a (usual) seasonal build for distillates. Last night’s API report yielded a -0.8 mb draw for crude, affirming the direction of today’s EIA expectation, if not the magnitude.

Yesterday’s monthly offering from the EIA, the Short Term Energy Outlook, yielded some interesting tidbits. It projected that US production dropped 100,000 bpd in July, egging it on to revise lower its average production expectation for this year to 9.4mn bpd. More significantly,  it also hacked 400,000 bpd off next year’s average to 9.0mn bpd. (That’s pretty chunky). On the upside, it still projects retail gasoline prices to average $2.41/gallon this year, a boon for the US consumer. (woot! woot!).

In terms of Iran, the EIA projects Iranian production to increase by an average of 0.3mn bpd in 2016, based on sanctions being lifted next year. Meanwhile, OPEC said yesterday that Iran’s production increased by 32,000 bpd to 2.861mn bpd in July. #ClipperData show Iranian waterborne crude and condensate exports pushing higher in July, well above the average of 1.17mn bpd for the first half of 2015.

The IEA has completed the hat-trick of monthly oil reports today, and is providing the impetus for a strong rally across the crude complex, despite the aforementioned Chinese capers hitting broader markets. The agency projects global oil demand to grow by a mighty 1.6mn bpd this year, up 0.2mn bpd from last month’s projection.

Next year’s oil demand growth is seen at 1.4mn bpd amidst a backdrop of ‘persistent macro-economic strength’ (I’ll raise my coffee to that). To add further bullish fuel to the fire, it saw world oil supply down nearly 0.6mn bpd in July (h/t non-OPEC supply), while global refinery runs reached a record 80.6mn bpd in July. It also sees supply growth swinging into contraction next year.

Although the IEA report still sees a supply glut persisting into next year, there have been enough bullish tidbits from this report to propel crude prices higher. Add to the mix the expectation for a crude draw from today’s inventory report and a supersonic flight from the US dollar, and crude prices are on a mid-week march higher.