Oh that “wobbling Asian demand.” That is the main reason the International Energy Agency (IEA) lowered their oil demand forecast by 100,000 barrels a day and lowered the boom on energy prices Tuesday morning.
Of course maybe the report from the IEA was written before they saw the data on Chinese oil imports that hit a high for the year last month and before they saw Chinese’s factory orders and retail sales beat expectations this morning. Chinese industrial output rose 6.3% last month from a year earlier, accelerating from 6.0% in July beating the Wall Street Journal’s median growth forecast of 6.2% by 15 economists surveyed. Chinese retail sales grew 10.6% last month compared with a 10.2% increase in July, beating a median forecast for a 10.1% rise in August.
This comes a day after the Organization for Petroleum Exporting Countries (OPEC) also lowed the demand for their crude oil and suggested that oil market's next move might be dependent on global central banker’s action. OPEC said that, “There are several key dynamics across the globe that are significant (to global growth) in the short-term Interest rates are already low in major economies and the effectiveness of further monetary stimulus has diminished, despite remaining crucial for some economies. Here, any decision from main central banks on monetary policies, particularly the U.S. Fed, will continue to be influential. Moreover, in most key economies the space for fiscal stimulus seems to be limited given high debt levels." In other words, without stimulus, oil prices may falter and perhaps the odds of stimulus could be falling.
They might be as confused as the Federal Reserve that has Fed Governor Leal Brainard saying it would not be prudent to raise rates prematurely. No wonder we are seeing wide swings in these markets. It’s because no one seems to know what the heck is going on and what the heck they are doing. Mixed signals from central bankers here and around the globe is causing uncertainty and now with a September rate hike has been taken off the table, traders now have to focus on hard fundamentals as opposed to will they or won’t they.
Let’s focus on some IEA highlights first. The IEA reduced demand 100,000 barrels a day for this year but still has it growing by 1.3 million barrels a day. But it also reduced its oil demand forecast by 200,000 barrels a day in 2017, growing at 1.2 million barrels per day based on Asian weakness and also Europe. The IEA said that the U.S. had shut 460,000 barrels a day of high-cost production, but that was made up by an 400,000-barrel increase in Saudi oil output.
The IEA said that OPEC crude production edged up to 33.47 mb/d in August, testing record rates as Middle East producers opened the taps. Kuwait and the UAE hit their highest output ever and Iraq lifted supplies. Output from Saudi Arabia held near a record, while Iran reached a post-sanctions high. Overall OPEC supply stood 930 kb/d above a year ago. The anemic outlook for refining extends further amid downward revisions to our 2016 forecast. Refinery runs in 2016 are set to grow at the lowest rate in a decade according to IEA. OECD total inventories built by 32.5 mb in July to a fresh record of 3,111 mb. As refinery activities reached a summer peak, crude oil inventories refused to decline until an exceptional storm-related draw hit the U.S. in late August.
Opec also lowered the demand for their crude pushing out glut predictions. The UK Brexit may have hurt demand and the world growth economic forecast is not helping. We still feel that OPEC and the IEA are being too pessimistic and while we did see growth slow, we are also seeing signs in China that stimulus is boosting oil demand and the fact the the Fed won’t move in September, as fodder for more demand.
Oil also is worried about a post hurricane rebound in supply that could see crude supply increase by 5 million barrels this week.