Thirty-one years after Michael Jordan was named Rookie of the Year in the NBA, and supply outages are ensuring that a rally is a slam dunk for oil today. Here are seven things to consider in the crude complex:
1) Goldman Sachs is being credited for encouraging a rally today, as it pronounced that the oil market is shifting into a deficit 'much earlier than expected', as a fourth Nigerian crude grade, Qua Iboe, comes offline due to a damaged pipeline. As demand growth continues to show strength, and outages start to add up, Goldmans suggests that the market has shifted into a deficit this month:
2) In terms of Qua Iboe, we can see from our ClipperData that crude loadings averaged 320,000 bpd last year, accounting for 17% of total exports. There are four Nigerian grades offline now: Bonny Light, Escravos, Forcados and Qua Iboe. Last year, these grades accounted for over 45% of total Nigerian crude oil loadings:
3) On the economic data front, China has served a triple dose of disappointment over the weekend, with industrial production coming in well shy of consensus at +6.0% (versus 6.5%), while retail sales came in at 10.1% (versus 10.5%). Finally, fixed asset investment came in at 10.5% (versus 10.5%). Chinese industrial production is now back close to the lows last seen in 2009:
4) We have had a couple of other releases of note today; the New York regional manufacturing from the NY Empire State manufacturing index came in well below par, showing worsening conditions for the first month in three.
Meanwhile, Russian Q1 GDP came in better than expected but still showing contraction at -1.2% YoY (versus -2.1% expected). A piece in the Wall Street Journal today addresses the challenges experienced by Russia currently, as the government is considering raising taxes to help ease its budget deficit. As the chart below illustrates, Russia's reserve fund is being swiftly depleted - to levels not seen since the 2009 financial crisis - as the government tries to plug the gap left by lost revenue from lower oil prices:
5) As demand fails to keep up with new supplies from the likes of the U.S. and Australia, Asian LNG prices have fallen to a seven-year low. Given the prospect of supply outpacing demand through the rest of the decade, suppliers are seeking new markets, with Shell signing a deal with Carnival, the cruise operator, and Woodside Petroleum signing a deal with Norway's Siem Offshore Inc, which operates Australia's first LNG-powered marine vessel.
As these cases illustrate, the use of LNG in transportation could be the outlet the market needs to soak up excess supply in the coming years. IHS estimates that transportation could account for 10% of LNG demand by 2030, while Korea Gas Corp projects that LNG as a marine fuel could rise by 13 million tons a year in 2020, and up to 64 million tons by 2030.
6) As oil prices continue to push higher - saving the bacon of some U.S. producers - the downside for the U.S. consumer comes in the form of higher retail gasoline prices. The EIA has revised up their expectation for retail gasoline prices this year, now expecting them to average $2.08/gal (<---- a paltry number when compared to the ~$3.50/gal seen in 2012, 2013).
As the chart below illustrates, the national average has increased by nearly a third since the February lows to $2.22/gal currently. The Midwest is seeing the brunt of the price rise, with Chicago gasoline prices up 50% from their lows to close to $2.50/gal. Supply constraints due to the Canadian wildfires are now adding a further supportive element in the near-term.
7) Finally, the latest data from the National Bureau of Statistics show that Chinese crude production dropped 5.6% YoY in April. In a similar fashion to the U.S., lower prices are spurring on extensive cost-cutting by Chinese producers - leaving a greater reliance on imports to meet rising demand.
We see in our ClipperData that waterborne imports into China are edging lower after last month yielded the highest volume in our records. Flows from both the two largest suppliers, West Africa and the Arab Gulf, are lower thus far this month, although Latin American flows have picked up.