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US net product exports supports NYMEX products

Published Thursday, November 21st, 2013

Yesterday provided us with more proof of the fall-out between the oil and stock markets as oil prices climbed higher whilst shares, together with the euro, took a hit. The moment the minutes from the Fed’s October meeting were released stock markets took a U-turn and finished the day in negative territory. The Dow Jones Industrial Average and the S&P 500 indices both lost 0.4% as minutes showed that the US central bank could start tapering in coming months. On this side of the Atlantic the ECB is reportedly considering negative deposit rates, a clear sign that sustainable economic growth is a long way off in Europe. This morning HSBC’s flash PMI on the Chinese manufacturing sector has done nothing to sweeten the sour mood from last night as the index dipped to 50.4 in November from 50.9 the previous month.

The common currency nosedived on the ECB news and closed 0.7% lower against the dollar. Despite the weakening of the euro and falling share prices, oil had its own issues to deal with and managed to crawl its way higher. Firstly, the Iranian nuclear talks resumed yesterday with conflicting noises surrounding the latest round of negotiations. On one hand the Russian foreign minister and his British counterpart feel it is the best chance to make significant progress in cutting back Iran’s nuclear enrichment. On the other, the Iranian Supreme Leader made it clear that his country would not step back from its nuclear rights.

The uncertainty of the Iranian issue might have been seen as supportive but the real boost for oil prices came from the weekly EIA report on US oil inventories. It showed total commercial stocks dropping by 12 million bbls. Crude oil inventories rose slightly with Cushing registering its 6th consecutive weekly increase, this time by 1.7 million bbls. As stocks were on the rise at the NYMEX delivery point, inventories in the USGC fell by 3.6 million bbls as refiners increased their runs there by 1.1%. This increase should have helped product stocks to grow but it was not the case. Nationwide gasoline stocks were down slightly and distillate stocks fell by a hefty 4.8 million bbls in the whole of the US and by 3.9 million bbls in PADD3. These draws were the result of US product exports as they reached their highest level of 1.7 mbpd since 2001, when records began. WTI lost $0.04/bbl on the day but Brent gained $1.14/bbl taking the January arb below the $-14/bbl mark. RBOB gained 235 points and Heating Oil settled 487 points up on the day.

Chinese economy is underperforming the rest of the world

The Dow Jones Industrial Average is some 12% above the pre-Lehman high of 2007. The MSCI’s global equity index is only 7% below the end-2007 high. Whilst the current stock market rally is led by the US, the rest of the world is coming to the party. If it were not for the dismal performance of the Chinese stock market global stocks would be much closer to the 2007 high. The Shanghai Composite index is still trading 64% below its all-time high back in 2007.

This general optimism comes despite the fact that the world’s GDP growth was 5.35% in 2007, is 2.87% this year and is forecast to be 3.59% in 2014, according to the IMF. The same figures for the US are 1.79%, 1.56% and 2.59%. This year’s growth rate is below the 2007 level both in the US and globally but next year the US will expand faster than it did in 2007 whilst the global economy will still be way behind. In other words, basic forecast growth rates the US stock market rally has some justification but the strength of the global stock market is something of a mystery. On a side note, as far as the relatively robust US growth rate is concerned, it is partly due to shale oil production, which is said to have added $74 billion to federal and state revenues and supported 2.1 million jobs in 2012, according to IHS consulting.

Current oil prices are 37% (WTI) and 28% (Brent) below the 2008 peak. After the credit crunch, global oil demand dropped to 84.3 mbpd in 2009, according to the EIA. This year at 90.24 mbpd demand is 7% above the 2009 level. At 91.38 mbpd it will be nearly 8.5% higher next year than 6 years ago. In other words, global oil demand growth has followed global and US economic growth but it has not had the same price affect as oil prices are still well below the 2008 level. This is because of the huge increase in non-OPEC supply which will continue to keep a lid on any oil price increase in the foreseeable future.

In an inter-dependant global economy the huge discrepancy that currently exists between the US and China surely cannot be maintained for the long run. The yawning gap between the US, global and Chinese stock markets is bound to narrow. If this narrowing takes place by global stock indices falling as opposed to the Chinese market rallying it will put further downward pressure on oil prices. The trigger could be the withdrawal of the QE.

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Posted by Tamas Varga

Tamas Varga has been in the oil industry since 1992 and with PVM for 18 years. During his time in the industry he has gathered a range of experience in the oil markets. At PVM Tamas is in charge of data collection and analysis.