By Barani Krishnan
Investing.com - Was last week’s U.S. crude build a one-off thing, or the start of a trend?
That would be the foremost question on traders’ minds as OPEC vows to restore sentiment in a market that briefly plunged to 7-month lows and into bear territory this week on heightened trade war worry.
A Bloomberg report citing an anonymous Saudi source as saying the kingdom wouldn’t tolerate a price crash like in 2018, with detail on the further squeeze Riyadh will be applying to its production to enhance OPEC export cuts, led to a remarkable crude price recovery in the last two days of this week. More startling was that the market completely ignored the latest dire warning on falling global oil demand from the Paris-based International Energy Agency (IEA).
But as a new week looms, the market’s attention is expected to revert to latest balances on U.S. crude, gasoline and distillates. In the previous week to Aug 2, those numbers weren’t pretty at all, with inventory builds across the board. The dataset from the U.S. Energy Information Administration (EIA) for the week ended Aug 2 was the catalyst to the double-digit losses initially seen in crude this week, before a partial rebound on Thursday and Friday.
While no one knows what the EIA will announce for stockpiles in the current week to Aug 9, what’s apparent is that the bulls have stanched the market’s bleeding for now – notwithstanding new trade war tremors that could send crude prices into another tailspin before the inventory data release on Aug 14.
Gold has also slowed after a strident march into $1,500 territory, with the spot price of the yellow metal slipping under that key marker on Friday, as longs await news of further trouble in the global economy or signs of impending Federal Reserve easing.
Energy Review
Bloomberg reported that Saudi Arabia plans to keep its crude exports at below 7 million barrels per day from September.
In good times, the kingdom can produce up to 10.3 million bpd. Now certainly isn’t one of those times.
To achieve lower exports, Riyadh’s state-run Saudi Arabian Oil Co., known as Aramco, will cut customer allocations across all regions by a total of 700,000 bpd in September.
For North American customers, the kingdom will send about 300,000 bpd less than they nominated for oil scheduled to load in September.
Reductions to European buyers will be larger and there will also be modest cuts to Asian buyers, although no specifics were available as yet.
As OPEC’s biggest producer, the Saudis are also banking on the rest of the cartel to take its lead in slashing total supply beyond the 1.2 million bpd that the group had committed to through March 2020.
These details, leaked to Bloomberg by a well-placed Saudi source, helped New York-traded West Texas Intermediate crude gain nearly 7% between Thursday and Friday, and Brent almost 4%.
The Saudi element aside, sentiment for oil was aided on Friday by strong Chinese exports data for July that proved the world’s second largest economy wasn’t that hurt after all by its protracted tariffs battle with the United States. Another feel-good factor for the market was the weekly decline in U.S. oil drilling activity, with the oil rig count falling by six to an 18-month low of 764.
Despite its late rebound, WTI ended the week about 2% lower at $54.50 per barrel as China’s yuan devaluation remained the overarching factor. Brent finished the week down more than 5% at $58.53.
If the EIA issues another bearish dataset this week, and China throws another trade curveball at the U.S., will optimism over Saudi and OPEC cuts continue holding crude prices up?
The EIA said crude stockpiles rose by 2.4 million barrels in the week to Aug 2, compared to forecasts for a stockpile draw of nearly 2.9 million barrels. It was the first crude inventory build after seven consecutive weeks of draws that removed nearly 50 million barrels from the market.
The EIA also reported that gasoline inventories unexpectedly surged by 4.44 million barrels last week, compared to expectations for a draw of 720,000 barrels. Distillate stockpiles increased by 1.53 million barrels, compared to forecasts for a gain of 480,000.
An important nugget in the EIA dataset for last week that wasn’t spoken about much was the slump in U.S. crude exports. A 710,000-barrel decline from the previous week’s exports figured largely in the 2.4 million barrel build.
And if CNBC’s reports about China’s plans to dramatically cut its purchase of U.S. crude over the coming weeks is true, it could cause U.S. crude inventories to swell again, pressuring WTI.
At last count, Iran was just pushing out about 100,000 bpd, versus the 2.5 million bpd it produced some two years back. With China’s support, Iran can quickly scale up its production, causing not just political headaches for Trump but also serious headwinds for crude.
Energy Calendar Ahead
Monday, Aug 12
Genscape Cushing crude stockpile estimates (private data)
Tuesday, Aug 13
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, Aug 14
EIA weekly report on oil stockpiles
Thursday, Aug 15
EIA weekly natural gas report
Friday, Aug 16
Baker Hughes weekly rig count.
Precious Metals Review
A week of easing by global central banks to shield their economies from the yuan devaluation gave gold longs hope for further gains in the yellow metal at the end of last week, despite the market’s retreat from six-year highs.
Spot gold, reflective of trades in bullion, dipped under the key $1,500 bullish mark on Friday, settling at $1,497.34 per ounce. On Wednesday, bullion hit $1,510.38, its highest price since May 2013.
Gold futures remained above the $1,500 mark at last week’s settlement. The benchmark December futures contract, traded on the Comex division of the New York Mercantile Exchange, settled Friday’s trade down just $1 at $1,508.50. On Wednesday, December gold surged to $1,522.35, a peak since Aug 2013.
For the week though, gold futures rose 3.5% and spot gold 4%, their largest gain in seven weeks.
For the coming week, gold longs will be looking for signs of the Fed and other central banks engaging in deeper rate cuts to blunt the impact of the growing trade war.
“In addition to fresh U.S. data, there will be some very important macro pointers from China, Germany and the Eurozone to look forward to as well,” said Fawad Razaqzada, analyst at forex.com.
“If the data in these regions remain soft, then expect to see fresh falls in safe-haven bond yields, which could have repercussions for the wider financial markets.”
Precious Metals Calendar Ahead
Monday, August 12
Financial markets in Japan are closed for a holiday.
Tuesday, August 13
U.K. employment report (Jun)
German ZEW economic sentiment (Aug)
U.S. CPI (Jun)
Wednesday, August 14
China Fixed asset investment (Jul)
China Industrial production (Jul)
China Retail sales (Jul)
U.K. CPI (Jul)
German preliminary GDP
Eurozone Flash GDP
Thursday, August 15
U.K. Retail sales (Jul)
U.S. Retail sales (Jul)
U.S. Philly Fed manufacturing index (Aug)
U.S. Empire State manufacturing index (Aug)
U.S. Industrial production (Jul)
U.S. initial jobless claims
Friday, August 16
U.S. Building permits (Jul)
U.S. Housing starts (Jul)
U.S. Michigan Consumer Sentiment (Aug)