Oil Prices Fall As Short Covering Seems To Have Run Its Course

Oil Prices Fall As Short Covering Seems To Have Run Its Course by Matt Smith, OilPrice.com

Seventy-eight years after oil was discovered in Saudi Arabia, and the Kingdom continues to wield its influence as much as ever. As oil prices charge lower today as short-covering seems to have run its course and as hopes surrounding production ‘freeze’ talks evaporate, here are eight things to consider in the oil market:

1) We have now seen the completion of the triumvirate of monthly reports from key agencies, with the arrival of OPEC’s monthly oil market report yesterday. The cartel has kept its demand growth expectations steady for this year at +1.25 million bpd, with growth seen predominantly from China (+0.29 million bpd), U.S. (+0.25), Middle East (+0.18), India (+0.18 million bpd) and the rest of Asia (+0.18 million bpd). Indian demand growth looks a little low-balled, but hey.

2) In terms of supply, OPEC production in February fell on the prior month, according to secondary sources, as both Iraq and Nigeria experienced pipeline sabotage, which dinged production by 263,200 bpd and 94,200 bpd respectively. These losses more than offset the 187,800 bpd increase seen via a post-sanction ramp-up from Iran. UAE also experienced a production loss of 49,200 bpd.

3) In terms of overnight economic data, the Bank of Japan left interest rates at -0.1 percent, as expected, while industrial production was in line with consensus, up 3.7 percent in February versus the month prior. French inflation ticked up higher than expected, up +0.3 percent MoM, while Eurozone employment growth continues to move in the right direction.

4) In the U.S., we see a return to form in economic data, with producer prices showing a distinct absence of inflationary pressures, being flat year-on-year, and down 0.2 percent in February versus the prior month. Retail sales fell less than expected in February (good), but saw a large downward revision to January’s print, to -0.4 percent from +0.2 percent (bad). As we know all too well, all paths lead back to energy, hence a 4.4 percent drop in sales at gas service stations (think: low gas prices) hurt retail sales the most.

5) The silver lining to today’s U.S. economic releases has come in the form of the NY Empire State manufacturing index, which showed improving conditions this month for the first time since last July:

NY Empire State manufacturing index (source: investing.com)

6) The chart below is a great snapshot of the revisions made to the EIA’s latest projections for non-OPEC production. In January it projected a drop of just 90,000 bpd for this year, but now this number is now seen at a much higher 440,000 bpd. While it has boosted its output expectations for Canada and Brazil, it sees greater losses coming through from the UK, Russia, Norway…and the U.S.:

7) Something to beware on this Ides of March is the API report out later today. For the corresponding week last year we saw a 10.5 million barrel build to crude stocks; it seems we will see a much lesser build this time around, as refinery runs are at a considerably higher level than last year, while according to our ClipperData, floating storage off the U.S. Gulf Coast is by no means flooding onshore.

8) Finally, this chart from the EIA today shows that oil from hydraulically fractured wells accounted for the lion’s share of U.S. oil production last year, with 51 percent of total output from 300,000 wells: