Oil rally unwinds ahead of inventory data

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nfOne hundred and sixty-eight years to the day after Niagara Falls stopped flowing due to an ice jam, and ongoing skepticism about a coordinated oil production freeze is meaning bullish positioning is coming unstuck today. Here are eight things to consider on the day before the day before the day before April Fool’s day:

1) Overnight economic dataflow was kicked off by a mixed bag of releases from Japan. Household spending came in much better than expected (up 1.7% MoM), while unemployment rose to 3.3% and retail sales were below consensus at +0.5% (YoY).

With a consensus print for Eurozone money supply being the main release of note out of Europe, we switch focus to the US, and the big bad daddio of housing from the Case Shiller. Year-on-year, house prices rose 5.7% in January across 20 metro areas, seemingly in a ‘goldilocks’ zone (not too hot, not too cool). There’s something rather soothing about the below chart (are you with me? …err, guys?):

SP CS housing S&P / Case Shiller house price composite, % YoY

2) Today’s pun of the day goes to ‘wrong side of the fracks‘ from the WSJ. The graphic below illustrates how bond prices for oil and gas producer debt are driven by their location. For example, junk bond prices have held up best in areas such as West Texas – where the Permian Basin is located – given that low costs make it the most profitable drilling area in North America.

In contrast, producers in areas such as East Texas – which include the Haynesville, Bossier and Barnett shale plays for this study – have seen bond prices plummet to less than 12 cents on the dollar as operations are unprofitable.

The Eagle Ford shale play sits inbetwixt the Permian and Haynesville, both geographically and bond price-wise (hark, bond prices at 52 cents on the dollar). While some wells within a narrow band in the area show strong enough initial flows (>800 bpd) to be profitable at $38, much of the Eagle Ford needs a higher oil price to make economic sense.

wrong side fracks

3) From one challenging environment to another, we take a look at oil production in Kurdistan. As the chart below illustrates, Kurdish production started the year at over 600,000 bpd, and was expected to increase by