Oil Rallies on Inventory Drop

Analisi Giornaliera - 10/06/2015

Prices of WTI and Brent Rise Dramatically on Biggest US Inventory Draw Since 2014

Major price momentum to the upside was witnessed late in yesterday’s session as a larger than anticipated drawdown in inventories gave way to optimism that oversupply fears were overblown. Even with high production and declining Chinese imports, prices have managed to identify a new upside driver.

Sharp Oil Uptick on API

Yesterday’s American Petroleum Institute crude oil stocks figure showed the biggest drawdown in inventories since July of 2014, with 6.70 million barrels of West Texas Intermediate leaving storage in the latest reading. The result was intense momentum higher with WTI rising over $2 points from the day’s lows. Even with OPEC choosing to let production quotas remain unchanged in the semiannual meeting concluded on Friday, much of the support for elevated crude oil prices continues to disappear. More important than the American inventories which are adjusting to seasonal factors like the increased summer demand is China’s imports which have nosedived. China is rumored to have filled its own strategic petroleum reserves on the back of weaker prices and now is holding off on further purchases. The evidence comes from the volume of oil imports which dropped to the lowest levels since the first quarter of 2014, representing the biggest decline in imports on a monthly basis since 2010.

European Stocks in the Dumps

The European Central Bank’s efforts to turnaround the economy were expected to be an implicit stimulus for stocks as a weaker Euro would work to buoy valuations. Although optimism has surrounded the region’s recent macroeconomic improvements like rising inflation, falling unemployment, and expanded lending, these might prove just temporary factors owing to the benefits from a cheapened currency. Mario Draghi has been unable to fulfill the promises of the quantitative easing program likely due to the narrowing supply of outstanding sovereign bonds for the asset purchase program to absorb. As a result of this underperformance, stocks which likely would have benefited from this development have instead trended lower, with European benchmarks trading at their lowest levels in 4-months. The German DAX has now corrected over 10% from highs seen earlier in the year. A deeper correction may be underway as the low volume summer months set in.

Warnings on Diminishing Returns from Easing

Takehiro Sato, a member of the board of the Bank of Japan, sounded the alarm bells after disparaging the virtues of quantitative easing and citing the risks of diminishing marginal returns. According to Sato, the incremental amount of benefit derived from each additional amount of easing continues to decline over time and raises other risks, mainly from a fiscal policy standpoint. From his standpoint, the quantitative and qualitative easing program undertaken by the Bank of Japan has delayed critical fiscal reforms in the economy and risks adding to the lack of fiscal discipline that has brought the nation to the brink of disaster. The government is focusing on showing a surplus by 2020 through a mix of increased tax revenues and growth while not concentrating on cost cutting according to recent comments from the Abe Administration. USDJPY took a major slide overnight dipping over 200 pips before recovering modestly.

Copper Equidistant Channel Technical Pattern

Industrial metals prices have begun to rebound after months of deterioration following increased speculation that Chinese Central Planners will choose to ease monetary policies again and introduce further fiscal stimulus to support production. The slide in exports and plunging imports show that policy actions might be warranted sooner rather than later to maintain the nation’s growth targets, adding to price momentum higher in copper prices after sliding to recent lows. The equidistant channel pattern appearing in copper prices has a bullish bias with the ideal strategy for taking advantage of the formation initiating positions at the lower channel line targeting the upper channel line. However, any delay in policy readjustments could see prices move below the lower channel line, indicating a potential downside breakout and paving the way back towards multi-month lows.