Now that the narrative of rising gasoline demand and a “strong summer driving season” is finally over, courtesy of gasoline stocks that just refuse to drop…
… and a glut in PADD1 that has never been greater…
… defenders of the “bull” crude oil thesis are stumped. “Doubts are rife as to whether the oil supply imbalance is indeed slowly drawing to an end,” Stephen Brennock of oil brokerage PVM, said.
So with no fallback “story” both WTI and Brent are down 20% since their last peak in June, as another bear market for oil has arrived.
Worse, earlier today we got confirmation that another parallel narrative, namely that OPEC is cutting its production, is also dead and buried. According to a Reuters survey, OPEC’s oil output is likely in July to reach its highest in recent history, as Iraq pumps more and Nigeria manages to export additional crude despite militant attacks on oil installations. Top OPEC exporter Saudi Arabia has kept output close to a record high, the survey found, as it meets seasonally higher domestic demand and focuses on maintaining market share rather than trimming supply to boost prices. Supply has been rising since OPEC abandoned in 2014 its role of cutting supply to prop up prices as major producers Saudi Arabia, Iraq and Iran pump more.
According to the survey, OPEC supply rose to 33.41 million barrels per day in July from a revised 33.31 million bpd in June.
There’s more: OPEC’s production could rise even further should talks to reopen some of Libya’s oil facilities succeed. Conflict has been keeping Libyan output at a fraction of the pre-war rate. “This could shortly release more oil into an already abundantly supplied market,” Carsten Fritsch of Commerzbank said, although earlier hopes of a restart have not been realized. “It therefore remains to be seen whether this time will be different.”
It won’t be different. As Reuters notes, OPEC’s output has climbed due to the return of former member Indonesia in 2015 and another, Gabon, this month, skewing historical comparisons. July’s supply from the remaining members, at 32.46 million bpd, is the highest in Reuters survey records, starting in 1997.
In July, the biggest increase of 90,000 bpd has come from Iraq, which has exported more barrels from its southern and northern ports despite a pipeline leak that restrained southern exports.
Nigeria, where output has been hit by militant attacks on oil facilities, has nonetheless exported slightly more in July than June, the survey found, although crude exports remain significantly below the 2 million bpd seen in early 2016.
Output in two major producers is largely stable. Iran, OPEC’s fastest-growing source of supply expansion this year after the lifting of Western sanctions, has pumped only 20,000 bpd more as the growth rate tops out for now, the survey found.
Saudi output in July was assessed at 10.50 million bpd, close to June’s revised rate and the record 10.56 million bpd reached in June last year.
And yet, despite the return of the record OPEC oil production, crude is now higher on the day, for one simple reason: oil is inversely correlated with the dollar. And thanks to today GDP shock, which showed that the US economy grew far slower than expected, the dollar has crashed.
As Bloomberg further adds, “WTI erases losses as dollar extends declines.“
Confused? Don’t be: it adds that “Dollar weakness follows disappointing U.S. GDP data, consumer confidence, according to Phil Flynn, senior market analyst at Price Futures Group in Chicago.”
In other words, the worse the US data, the better for oil.
And with S&P correlation algos today programmed to only track the oil price signal, this means that after sliding shortly after the GDP report, the S&P500 is now back at intraday highs, and on pace to hit new all time highs.
To summarize: bad economic news -> weak dollar -> higher oil -> record S&P500. Rinse, repeat.
And that’s how terrible news is great news again.
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