Don’t Expect A Genuine Bull Run In Oil

Oil prices were higher to begin the week on expectations that the US Federal Reserve will lower its key interest rate by 25 basis points later today. As technicians, we feel somewhat positive on the market with Brent gradually moving from $60 in mid-June to near $65 this week, but we have to admit that recent market obsession with a central bank move to come to the rescue of a slowing economy has us thinking that global growth concerns will be here to stay at least in the near term.

For starters, there is no question that the Fed's recently dovish pivot- which has driven the expectation the bank will cut rates later today- has benefited risk assets. Crude oil prices are higher by about $2-$3 since Chairman Powell's dovish testimony before Congress in June and the US stock market is higher by about 3% despite a lack of progress in US/China trade talks (this week Trump was lamenting the failure of Chinese firms to step-up US agricultural purchases as he hoped they would.) Unfortunately, we think market sentiment may very well focus from easy central bank policy to the need for easy central bank policy once the rate cut is presumably complete. And why is the rate cut necessary? Recent US economic data has taken a decidedly cool turn with 2Q GDP growth falling from 3.1% in 2018 to 2.1% in 2019. The US has been a star performer among mature economies in the last five years and the idea that its growth is cooling should indeed be scary to markets. Even worse, recent US woes are not occurring in a vacuum. China's 2Q'19 GDP growth printed 6.2% for its lowest reading on record while mean GDP growth across the Eurozone for the same period was just 1.0%.

Even more distressing is the poor crude oil and gasoline demand data we're seeing in the US from the Department of Energy on a weekly basis. So far US refiner demand is lower by a shocking 240k bpd so far in 2019 for a y/y decrease of 1.4% while domestic gasoline demand + exports are lower by 0.7%. These are alarming numbers for an economy that is experiencing GDP growth of +2% and underscore the trends in the market that have the IEA forecasting global crude oil production to outpace demand by more than 500k bpd through the rest of the year despite a massive effort from OPEC+ to take barrels off the market.

Markets are virtually certain the US Fed will cut overnight rates later today and, to be sure, that's a positive move for risk assets. On a longer timeline, however, we're concerned that market sentiment could sour as traders focus on the paltry economic results creating a need for lower rates rather than the central bank move itself. We also need to remember that Chairman Powell already set the stage for the Fed's first rate cut in ten years back in the winter and the majority of the bullish move it enables is mostly likely already priced into assets.

Going forward, oil market bulls may have to depend on US/Iran tensions for positive price action. Much like OPEC+, the central banks are effective at managing downside risk for markets, but it's hard to have a genuine bullish run in the absence of strong fundamentals.

Quick Hits

- Brent crude traded just under $65 to begin the week with help from expectations the U.S. Fed would lower interest rates by 25 basis points at the conclusion of their meeting later today. Chairman Powell's remarks will be critical in determining the next steps in the market. If he gives a bearish view of the US economy and suggests that further rate cuts are on the way, we can obviously expect a sinking US Dollar and higher oil prices. If the Chairman signals that one cut is enough, the US Dollar will likely rally. Bond markets have currently priced in one rate cut.

- US equities have benefited nicely from the central bank expectations. S&Ps traded above 3,000 for the first time this week despite frustrations on the US/China trade front.

- Overseas in equity markets the Shanghai Composite was slightly higher near 2,950 and the Euro Stoxx 50 sank to 2,460.

- Brent spreads moved higher after BP acknowledged that it isn't currently shipping crude through the Strait of Hormuz due to safety concerns.

- Bloomberg's crude oil tanker tracker spotted eleven ships near Chinese ports this week while reporting that China has been importing about 200k bpd of Iranian crude in recent weeks.

- Iran's President Rouhani opened a dialogue with French leadership this week in an effort to begin a dialogue with the West on their current sanctions. We continue to believe that Iran's recent provocations have been an effort to get the West back to the negotiating table so it can re-enter global crude markets.

- Gasoil spreads moved higher in the front of the curve this week with help from crude oil strength and ongoing tensions in the Strait of Hormuz. Gasoil structure is currently much tighter than US Heating Oil structure suggesting that product markets abroad are much tighter than the US market.

DOE Wrap Up

- US crude oil stocks fell sharply last week from 456m bbls to 445m bbls. Total inventories are higher y/y by 11% versus 2018 over the last four weeks.

- US crude production fell more sharply than we originally thought due to hurricane Barry. Overall production printed 11.3m bpd representing a 700k bpd decline w/w.

- US refiner demand fell 230k bpd w/w to 17.0m bpd also due to the hurricane which affected the USGC.

- Crude inventories in the Cushing delivery hub increased 110k bbls w/w to 50.4m.

- US crude exports increased last week from 6.8m bpd to 7.0m bpd. Exports also increased from 2.5m bpd to 3.3m bpd bringing net imports for US traders of 3.7m bpd.

- The US currently has 25.8 days of crude oil supply on hand.

- Gasoline inventories fell 225k bbls w/w to 232.5m and are lower y/y by 3% over the last four weeks.

- The US currently has 24.4 days of gasoline supply on hand.

- Implied US motor gasoline demand (domestic + exports) printed 10.23m bpd last week and has averaged 10.1m bpd over the last four weeks which is lower y/y by about 330k bpd.

- Distillate stocks increased by 600k bbls to 137m and are higher y/y by 11%.