Gasoline inventories worrying the oil market

Oil will be front and centre in the Asian session today in the wake of the weekly EIA oil inventories report which drove declines in the US markets.

Source: Bloomberg

WTI oil lost 4.8% overnight after crude oil inventories dropped by 2.2 million barrels, which was far less than the 6.7 million barrel decline seen in the API crude oil inventories number the day before. But the real focus in the market is the lack of decline seen in gasoline inventories. Summer driving season in the US will end within the next two months, which is when demand for gasoline is at its highest, and yet gasoline inventories are not declining as expected. This is developing into a major concern for the oil market because once the seasonal demand disappears, gasoline inventories could be set to explode in the second half of the year. All of the major US refiners look set to continue to see further falls after what was already a nasty session overnight: Valero (VLO), PBF Energy Inc. (PBF), Phillips 66 (PSX), HollyFrontier Corp (HFC). In year-on-year terms, gasoline inventories have actually begun to rise again – the last thing the oil market wants to see.

WTI oil dropped to its lowest level in roughly two months overnight with many longs possibly capitulating their positions around recent technical support at the US$46 level. For the moment oil is holding above the US$45 level, but technically there is not much support to hold it above the US$43 level and further declines could be in the offing.

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Currently, Asian equity markets look set to follow the oil price lower. Iron ore and copper also lost more than 1% overnight as the DXY dollar index continued to push up above the 96 level. This did not help BHP’s ADR in the US session which lost 2.8%. The ASX is set to open more than 0.5% lower with the materials and energy space lining up for a difficult session.

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Markets are also likely to be nervous today ahead of US non-farm payrolls this evening. The market consensus is for 180,000 new jobs to be added in June, but the memory of last month’s major miss is still prevalent in the mind of investors. On the positive side, the ADP payrolls saw added 171,600 jobs – the biggest month since March. The weekly unemployment claims also dropped to 254,000 and have been trending down all through June as well.

Chinese FX reserves were also released overnight providing further evidence that Chinese currency management has been one of the key beneficiaries of the focus on Brexit over the past couple of weeks. China has managed to significantly depreciate their currency while the world was focused on other more pressing matters. And Chinese FX reserves increased by US$13.5 billion in June, something that no doubt pleased PBOC governor Zhou Xiaochuan.

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