Market Currents – August 13, 2015

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Third time is a charm as China has reset its currency peg for a third day on the trot. The law of diminishing returns means markets are somewhat insulated from the fear factor of a third day of currency devaluation, while financial markets put on their rose-tinted glasses and buy in (literally) to the prospect that this latest attempt from China to stimulate its economy just might work. Hence, global equity markets are looking perky, the dollar is seeing some strength, and crude prices are getting pressured lower once more.

US economic data returns to the fore, with weekly US jobless claims coming in just shy of consensus at 274,000 (but no biggie), while tales of retail sales come in better than expected at +0.6%, versus 0.5% consensus. (Go-go gadget rate hikes!).

The big conundrum the crude complex is having to deal with here in the US is refinery and pipeline issues in the Midwest. An outage at the Whiting refinery, the largest in the Midwest, could keep 240,000 barrels a day offline for a prolonged period, stoking fears that Cushing stocks could get filled to the brim in the coming months. Meanwhile, the loss of demand for Western Canadian Select crude (see below) sees its price plummet to the low $20s – only worsened by a pipeline leak on the Flanagan South in Missouri (although this is expected to re-start today).

While we have seen the lagged impact between the falling rig count and the ripple effect to US production play out rather well over the last nine months, North Sea production highlights that investment periods work over a much longer time-frame. Hence, as investment in the North Sea has picked up over the last four years to participate in an oil market predominantly spending its time in triple digits, output has risen for two consecutive years (hark, first time since 2000)…..only to be greeted by oil in forty dollardom. Output is likely to turn south once more in the coming years.

North sea oil rebound

As Canada’s crude benchmark, Western Canadian Select (WCS), drops below C$30 (