Crude Oil Nears 5-Week Low

Daily Analysis - 02/05/2017

Rising Output Stokes Supply Concerns

Following a brief rally last week on OPEC chatter surrounding the possible extension of the initial output cut deal, crude oil fell in early Tuesday trade to the lowest prices in over a month. Rising US supplies and a recovery in Libyan output has reignited concerns that OPEC-led production curbs may not meaningfully tighten the bloated market.

Brent Heads Back Towards $50

With the semi-annual Vienna meeting rapidly approaching, OPEC is expected to make a decision on extending its output cut deal on May 25^th. However, analysts are becoming increasingly sceptical that any extension of the OPEC deal at current levels may not be enough to shift global inventories to more normalized levels.

Data released Friday by US oil services giant Baker Hughes showed a rise in active oil rigs for a 15^th consecutive week, adding to concerns that domestic production will gradually follow the operational rig count higher.

Also weighing on investor sentiment is the ongoing recovery in Libyan oil production, with the National Oil Company reporting that production has risen to its highest level since December 2014.

Brent July futures were last seen around $51.37 a barrel as the immediate trend remains bearish, with a dip below the $50-mark looking increasingly likely.

US Construction Spending Dips

After increasing for five straight months, US construction spending unexpectedly slipped in March, hit by a pause in private investment. Data compiled by the Commerce Department released on Monday showed that construction spending fell -0.20% to a seasonally adjusted $1.218 trillion, compared to an upwardly revised gain of 1.80% in February.

The consensus estimate of economists projected an increase of 0.40% in construction spending during March. Even with the modest decline, construction activity for the period was the second highest on record, and underscores the key role the sector is playing in boosting US economic activity, with spending advancing 3.60% compared to a year earlier.

Investments in private construction remained unchanged after surging 1.70% in February, while public construction spending fell -0.90% in March after jumping 2.30% in the month before.

In the meantime, Dow futures continue to trickle lower following last Tuesday’s spectacular one-day rally.

Swiss Retail Sales Rise More Than Forecast

According to preliminary data from the Federal Statistical Office, retail sales in Switzerland grew for a second consecutive month in March at a pace that was the strongest in nearly three years.

Retail sales increased 2.10% year-on-year, compared to the 0.70% growth recorded back in February, easily topping market expectations of a figure close to 0.50%. The rate of growth was the fastest since June of 2014.

On a monthly basis, retail sales edged 0.70% higher in March with sales of food, beverages, and tobacco rebounding by 0.80% after falling -1.50% in February. Non-food sales soared 4.10%, versus the 1.60% gain posted in the previous month.

However, the pickup in fundamentals was not enough to move the needle on the Franc, as USDCHF trades largely unchanged early Tuesday, trending just below a one-week high around 0.9955.

Japan Services PMI Slows

Activity in Japan's services sector eased in April after seven straight months of acceleration, providing signs that the broader economy could be losing momentum or at the very least experiencing a pullback.

On a seasonally adjusted basis, the Markit-Nikkei purchasing managers’ index for the Japanese services sector came in at 52.2 during April, down from a 19-month high of 52.9 reached back in March. New business growth tumbled to its lowest level since November, while input prices growth also decelerated for a third month running, raising questions about how the inflation picture is evolving.

Considering that the services sector accounts for approximately two-thirds of Japan's gross domestic product, any further easing in the sector could hurt the economy which is in the midst of a modest, export-driven recovery. USDJPY is gaining ground on Tuesday, and was last seen climbing past 112.000.