Another day, another dollar (rally). Crude prices are again coming under downward pressure as economic concerns swirl and uncertainty swells. That said, dollar strength was mucho more apparent earlier in the day; as the dollar eases from its highs, oil is paring its losses - ahead of weekly inventory data tomorrow, and Nonfarm Friday the day after. Hark, here are five things to consider in oil markets today:
1) As we zoom past the 4th July holiday, with a record number of people hopping in their cars and putting the pedal to the metal, realization has dawned that we are in the midst of a gasoline glut, regardless of what demand is doing. As as we reach the peak demand plateau of the summer driving season, gasoline prices recently have been getting a good ole fashioned drubbin'.
We highlighted on our Twitter account last week that a number of gasoline cargoes (such as the Torm Neches - see image) are being diverted away from the U.S. East Coast, while we also highlighted on CNBC how we are seeing vessels anchored outside of New York Harbor. These views have been affirmed elsewhere in recent days.
2) The fundamental weakness in gasoline markets is being exemplified by the Rbob crack spread, which is closing in on levels which could encourage refiners to dial back on runs. In fact, we are already starting to see signs of this; Delta has cut production rates by ~16 percent at its Trainer refinery - likely given the drop in refining margins.
As the chart below illustrates, the 1st month Rbob crack spread has been dropping since April, whereas last year it gradually increased through the peak summer demand period. We find ourselves dropping below $15/bbl, now less than half the profitability seen at this time last year:
3) While on the topic of gasoline, the mighty Abudi Zein (aka the Oracle of Oil) is the author of this piece which has just been published on RBN Energy. The piece highlights how the overhang of crude oil has resulted in a petroleum product glut, and how refiners are now trying to export their way out of trouble. Be sure to read it!
4) There's little on the economic data front, with the highlight being the US services PMI, which came in just slightly below consensus (51.4 vs. 51.5 expected), so let's take a peek at natural gas instead.
Despite record heat to start the summer, some moderation in the weather extremities as we move into the second half of July mean the good ship natty is heading lower today. June's demand data give credence to the recent rally; natural gas consumption by electricity generators was up 8.9 percent in June from year-ago levels. This is a significant influence given that power generation accounts for ~36 of total natural gas demand.
5) Finally, honing in on Angola, the West African nation has decided to end talks with the IMF about a bailout loan which is needed to help stabilize its economy amid the slump in oil prices.
Similar to other petro-states like Venezuela, it is dependent on oil exports for nearly all (97 percent) of its export revenue, and for ~70 percent of its government revenues. Angola's currency, the kwanza, has lost about 35 percent of its value, driving up the cost of imports, while inflation is spiraling higher - up to nearly 30 percent in May. As the chart at right illustrates, its current account balance has swung to a 12 percent deficit of GDP this year.
To compound their woes, as we have mentioned previously, Angola has relied heavily on Chinese investment in recent years, swapping its oil for infrastructure projects. As its debt has increased, Africa's second largest producer (behind Nigeria) is having to increasingly send more oil to China.
Our ClipperData show that Angolan crude exports to China have now accounted for more than 50% of its total crude exports in three of the last five months. If Angola is unable to negotiate some type of bailout, its economy is set to spiral further out of control, while the revenue it can collect from its crude exports is reduced.