Oil Back on the Retreat

Daily Analysis - 14/12/2016

Futures Prices for Both Brent and WTI Lower

With speculators never more long Brent futures contracts in history, the latest pullback in prices could be indicative of profit-taking after the spectacular post-OPEC rally and reports of collaboration with non-OPEC members to help alleviate the longstanding supply glut.

Surprising Inventory Build Sends Oil Lower

Oil prices retreated on Tuesday following a bigger than anticipated build in US crude oil inventories last week reported by the American Petroleum Institute. According to API, US crude stockpiles rose by 4.680 million barrels last week with storage at Cushing climbing by 632,000 during the same period, erasing more than half the drawdown experience over the summer months. This contrasts sharply with an expected drawdown in the headline figure ahead of official data due from the US Department of Energy later in the session. Furthermore, gasoline stockpiles rose by 4.905 million barrels last week, marking the biggest increase since January and highlighting the lingering potential for storage facilities to rapidly fill. While market speculators have never been longer Brent crude oil according to figures reported by ICE last week, it could imply a sharp reversal lower in prices if EIA data corroborates the API figures.

Japanese Manufacturing Confidence Improves

Even though industrial production stagnated at 0.00% on a monthly basis during November, sentiment in the manufacturing sector continues to improve. The Tankan large manufacturers index released quarterly by the Bank of Japan showed confidence rising to the highest point since the fourth quarter of 2015 as firms plan to continue growing capital expenditures through the end of the first quarter of 2017. On the other hand, the non-manufacturing index was unchanged from the third quarter at 18, missing forecasts of 19 for the period. In the meantime, government officials have indicated that the Japanese government is projecting real economic growth of 1.50% during the 2017 fiscal year beginning in April. Nominal growth, which does not account for inflation, is expected to read at 2.50% for the fiscal year. USDJPY is slightly lower heading into the European open, trending just below 115.000.

UK Inflation Climbs to 2-Year High

In a sign that the weaker Pound is being felt throughout the economy, the latest consumer price inflation data shows that producers and importers are beginning to pass along rising costs to consumers. Headline inflation figures reported during the month of November showed that prices for a basket of goods and services rose by 1.20% on an annualized basis, printing at the highest point since October 2014. The main drivers of the latest inflation figures were transportation costs which rose by 2.50% alongside clothing and footwear which climbing 0.90% during the period. The drags predominantly came from food and beverages. The core inflation figure was also higher, printing at 1.40% and likely easing pressure on the Central Bank to accommodate monetary policy further over the coming months. After closing slightly lower on Tuesday, GBPUSD is trending mostly flat on the session.

New Chinese Loan Creation Smashes Expectations

As officials within the government and central bank work to prevent economic activity from decelerating further, adding liquidity has been a major focus of their strategy. According to figures released earlier in the session by the People’s Bank of China, CNY 794.6 billion in new loans were issued during the latest measuring period, topping forecasts of CNY 720.0 billion while vastly outpacing the prior figure of CNY 651.3 billion. This brought outstanding loan growth up to 13.10% on an annualized basis as policymakers try and avert a slowdown. The money supply also continues to grow, climbing by 11.40% during the same period. However, this development is likely to sustain the downward pressure on the Yuan over the medium-term as the predominant solution pushed by policymakers is to expand financing. The Yuan is strengthening modestly at the outset of the European session, with USDCNH falling the last two sessions.