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No quarter given to oil prices in wake of inventories

The major story overnight is the dramatic 3% drop in WTI oil. Oil is increasingly pulling back towards the US$40 a barrel level and many in the markets are concerned that the shorts may even be looking for prices to drop down towards the US$35 level.

Oil
Source: Bloomberg

Crude oil inventories in the weekly EIA report saw the third weekly increase in a row despite the market expecting a decline. Although of late the oil market has been very concerned about the growing supplies of gasoline and distillate inventories, and on this front the EIA reported much bigger than expected drawdowns in both gasoline and distillate inventories. But the issue is that the margins for refiners may have collapsed so much that they have simply stopped producing and now we could be about to start seeing much bigger increases in crude oil inventories again as the refined oil product market has become completely saturated. OPEC also released its monthly report overnight, showing a further month-on-month increase from the group in July. And most concerning for the supply-demand balance of the oil market, Saudi Arabia produced a record output of 10.67 million barrels a day in July.

AUM-Oil-110816

After nine weeks of back-to-back weekly declines in EIA crude oil inventories, we are starting to see crude oil inventories pick up again.

But at least we are starting to see some healthy pullbacks in gasoline inventories.

The pullback in oil alongside the step up in the pace of central bank bond purchases in Europe and the UK saw major overnight buying of US bonds overnight with yields declining by 3-5 basis points across the board. The iShares 20+ Year Treasury Bond ETF (TLT) gained 0.4%.

The US JOLTS employment data showed a solid 110,000 new openings in June after a big decline in May. But while the vacancy rate and hiring rate both saw a nice bounce, the separations rate declined to its lowest level since October 2015.

Oil is increasingly looking like it may want to retest its US$39 lows that it touched at the start of August.

Kiwi Dollar

The RBNZ cut interest rates as expected by 25 basis points down to 2% this morning. Even though the 25 basis point rate cut was fully priced in, there was uncertainty that the RBNZ could even have opted for a 50 basis point rate cut and this is what primarily seemed to be holding the Kiwi down from gaining further overnight. As such, once the 50 basis point fears turned out to be unfounded the Kiwi dollar promptly rallied 1.2% to take its full overnight gains to 1.8%. But the RBNZ could hardly have been more explicit about the prospects for further easing, stating: “Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range.” Given the dire state of inflation in New Zealand and its comparatively high yields on offer helping drive up the currency, three more rate cuts in the next twelve months are quite possible to bring rates down to 1.25%.

Equities look set to follow the US markets lower in the Asian session. The main bright spot may be the materials space after a weaker US dollar produced strong gains for both copper and gold. The energy space, however, looks like it will be in for another difficult session after the 3% drop in WTI oil overnight.

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