Oil Prices No Longer Heading For 'Low For Long' Syndrome: Or Is It A Momentary Pause?

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Includes: OIL, USO
by: Procyon Mukherjee

Summary

Current Crude Oil prices is a part of a broader rally in a range of commodities, which may not be a temporary phenomena.

The softness in the dollar provides a perfect ground for commodities to move up.

The Chinese data and the Press release points to an industrial rebound in a broad range of parameters, which bodes well for commodities.

Four sets of data from the EIA website this week need some careful attention:

  • WTI Crude Oil Futures Price: As on 4/26/2016: $44.04/bbl, which is up $2.96 from week earlier but down $12.95 from year earlier.
  • Natural Gas Futures Price: As on 4/26/2016: $2.032/mmBtu, which is down $0.056 from week earlier but down $0.458 from year earlier.
  • Retail gasoline Price: As on 4/25/2016: $2.162/gal, which is up $0.025 from week earlier but down $0.408 from year earlier.
  • Crude Oil Inventories: As on 4/22/2016: 540.6 mmbbl up, which is up 2.0 mmbbl from week earlier but up 49.7 mmbbl from year earlier.

The EIA Monthly Energy review of April, provides us very little new information other than what we knew already that the consumption factors are not entirely favorable while the supply factors, which have been buoyant till December 2015, is now more stable (given on page 2) and the active rig count has been constantly drooping (given on page 90). That supply and consumption was not in balance is provided by the rising inventory data, while the zooming export seems to be now tapering off. The math behind the production increase is matched by reduction in imports as residential and transportation sectors showed little signs of sustainable increase in consumption factors.

The Goldman thesis propounded by Jan Hatzius, "Low for Long", was a climb down from the earlier forecasts of $65 per barrel for 2016, which was adjusted to $45 per barrel in this report. However, the current price trend seems to be pointing to an uptick no one predicted for April'16.

Are we missing something? There are a couple of indicators we better watch.

Firstly this is part of a broader short term rally in commodities with base metals leading the pack with Aluminum.

Secondly we see a softening in dollar index, which may not be temporary and could last long than many would have anticipated. The Fed statements did nothing to the dollar and the softness could be one dominant reason for the rise in commodity prices across the whole range of the basket.

But we should not neglect China, where the first quarter report is out in this Government website and is pointing to three very important parameters, which no one should miss:

The Chinese Economy had a good start in 2016, although the first quarter GDP climbed down by 0.1% at 6.7% from 6.8% in the previous quarter. The three indicators that were strongly showing up were:

  • 10.7% growth in investment in fixed assets in March 2016, which is a sharp change from 10.2% from the previous months
  • 6.8% growth in the value added in the industrial enterprises in March'16
  • Industrial profits increased substantially in the first three months of 2016

Results of March'16 made quite some headlines in China with this April Press statement, "In March, the profits made by industrial enterprises above the designated size achieved 561.24 billion yuan, a year-on-year increase of 11.1 percent."

The net worth for industrial enterprises have also been growing and this is evident in the press release, "By the end of March, the total assets of industrial enterprises above the designated size was 96,984.04 billion yuan, increased by 5.7 percent year-on-year; the total liabilities reached 55,220.32 billion yuan, increased by 5.2 percent; the total owners' equity was 41,763.72 billion yuan, increased by 6.4 percent."

The Chinese press release is perfectly in line with the 13% rise in Chinese M2 growth year on year in March 2016 over last year and the rise this year seems to be continuing unabated. Chinese industrial houses have reason to believe that fixed investments by private players can now pick up, which has been quite subdued according to the chart as attached.

So the overall picture for Oil and other commodities is more guided by the positive sentiments in China than by the fruitless exercise at Doha, which was guided by the statistics that the rise in production at Iran would compensate for the capacities taken out by non-OPEC countries.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.