Excess supply, fall in demand to keep crude oil prices in check
Data from China showed that factory output slowed to its weakest pace on record last month.
Data from China showed that factory output slowed to its weakest pace on record last month, adding to pressure on the country to unleash further fiscal and monetary stimulus as the trade war with the US remained unresolved.
Other sectors of China’s economy showed more resilience in May, with retail sales growing 8.6 per cent up from 7.2 per cent in the previous month. The pace of industrial sector growth, down from 5.4 per cent in April, was in effect the weakest reading since the data series began in 1995.
CFTC data showed that hedge fund managers continued to liquidate long positions at the fastest rate since the Q4 of 2018 due to rapidly increasing fears about a global economic slowdown.
Data from EIA showed that US crude supplies for the second week, by 2.2 mbpd against the expectations for a drawdown of about 481,000 barrels. US stockpiles now stand at 485.5 million barrels, the highest level since July 2017. This is 8 per cent above the five-year average for this time of the year.
Meanwhile, data from the US showed that the number of active oil and gas rigs fell again this week, as the overall rig count reaches the lowest point since February 2018. The total number of active oil and gas drilling rigs in the United States fell by six according to the report, with the number of active oil rigs falling by one to reach 788 and the number of gas rigs decreasing by five to reach 181.
IEA monthly report
Monthly report from IEA slashed its estimate for global oil demand growth for the second consecutive month, citing intensifying trade concerns amid fears of a global recession. IEA projected oil demand growth to reach 1.2 mbdp this year. That’s a downward revision of 100,000 bpd from the IEA’s previous projection. Global oil demand is estimated to have risen by just 250,000 bpd YoY in first quarter of 2019, reflecting the lowest annual growth since the fourth quarter of 2011.
Looking beyond the end of 2019, IEA forecast global oil demand growth to rebound to around 1.4 million bpd in 2020. While in its first estimates for 2020 the IEA sees oil demand accelerating, this is more than matched by output gains from nations outside OPEC+.
The IEA cited various reasons for slowing global oil consumption, including a warm winter in Japan, a slowdown in the petrochemicals industry in Europe, tepid gasoline and diesel demand in the United States and the worsening trade outlook.
Even the Opec expects lower demand in the second half for the crude it produces. The Middle East dominated group after data showed that its oil output slipped to a 5-year low in May. It comes at a time when Opec and its allied partners are considering whether to extend a six-month deal to hold down output.
Middle East tensions
Crude jumped after the US blamed Iran for attacks on two tankers in the Gulf of Oman last week, but struggled to hold those gains despite fears of a broader military confrontation in the Persian Gulf and the potential for trade disruptions in the Strait of Hormuz.
More than one-third of the world’s seaborne crude oil is shipped through the strait. Since there was no major supply disruption or an escalation of military activity in the region, the short-covering rally fizzled and there was no follow-through to the. Therefore till there is military response to the attacks, which would lead to actual supply disruptions, any gains are likely to be limited.
Natural gas prices ended the week on a positive note, in anticipation of the return of hotter temperatures late in the month. The data from EIA showed that domestic supplies of natural gas rose by 102 Bcf against an expectation for a build of 110 Bcf.
There are no hurricanes reported in the Atlantic and the weather is expected to be mild over the next two weeks keeping cooling demand stable. The forecasts of weather are pointing towards hotter days ahead which continue to provide support to the prices. There was a hotter shift in the European weeklies, hinting at hotter chances in the eastern half of the nation into the first half of July.
Market is expecting the status quo to continue from Opec and its partners, but there is a growing possibility that the tension will only rise. Even if Russia does not appear at the Opec meeting, the nation will loom large over the discussions.
This week the Federal Reserve will reveal more about the state of the US economy. While hopes that the Federal Reserve will lower interest rates have kept equity prices near record levels, the excess supply and negative momentum indicators continue to keep commodities under pressure.