Oil Gains Capped By Burgeoning Global Supplies

Daily Analysis - 26/01/2017

US Inventories Rise as Production Climbs on Back of OPEC Deal

Despite the intention to reduce the global glut by cutting back on production and helping reduce outstanding stockpiles, the OPEC deal is creating new incentives for other producers outside the deal as US producers not party to the deal are able to ramp output higher on the back of higher prices.

US Crude Supplies Grow as Demand Ebbs

In an unsurprising sign, US crude oil inventories grew for a third straight week and four of the last five periods according to figures released by the Energy Information Administration on Wednesday. US stockpiles rose by 2.840 million barrels, beating expectations of 2.815 million and the prior week’s reading of 2.347 million. Meanwhile, in a sign that the growing number of active US drill rigs is adding to upside in production, output rose to 8.961 million barrels per day last week in a sign that US production will continue to trend higher over the coming months.

Besides crude oil, gasoline stockpiles continued to rise, with supplies now 3.40% above level reported a year earlier. However, the more concerning development is falling demand which contracted by 3.62% over the last four weeks. After slipping on the news, WTI futures have managed to retake the $53.00 per barrel level.

New Zealand Inflation Bounces

After taking significant steps to accommodate monetary policy over the last year, the efforts of the Reserve Bank of New Zealand are beginning to show results as evidenced by the latest inflation figures. Data delivered overnight by Statistics New Zealand showed that headline consumer prices rose by 1.30% year over year through the end of fourth quarter compared to the 0.40% reported during the third quarter.

Besides beating expectations, the figure is putting fears of a deflationary spiral to rest, at least for now with the figure climbing back into the Central Bank’s target band of 1.00% to 3.00% inflation over the medium-term. One of the predominant drivers was the significant uptick in energy costs which raised prices for consumers. The result of the latest figures was the New Zealand dollar climbing to a 10-week high against its US counterpart before pulling back.

Dow Futures Break 20,000

In a sign that investors are growing increasingly positive about the outlook for the American economy, the Dow Jones Industrial Average rose above the 20,000 mark for the first time, reaching a record high and closing above the key psychological level. The surge in US equities has also lifted benchmarks across the globe, with Asian stocks rising overnight, mirroring the gains in US index futures.

Although promises of tax cuts and economic stimulus have helped bolster investor optimism, there are some concerning signs on the horizon as company insider selling accelerates. Furthermore, the heightened pace of outflows from funds that track US stocks could be viewed as a worrying sign. Per the Investment Company Institute (ICI), investors continued to reduce exposure to US stocks, cutting positions by $3.7 billion last week. In the meantime, Dow futures remain on the upswing, extending a climb from the last two sessions.

Norwegian Unemployment Slides

In a sign that higher oil prices are beginning to benefit the Norwegian economy, the latest jobless figures point to the lowest rate of unemployment since May, printing at 4.70%. Although the government has worked to help promote growth in the economy by drawing upon the nation’s sovereign wealth fund to add fiscal stimulus, this job creation figure might lead to a rollback of some measures.

These fiscal measures are likely to fade over the coming months as the energy economy recovers from the oil price bust over the last year. Furthermore, the gains in energy prices are helping the Krone rebound against peers, which will help temper inflation which has risen beyond levels targeted by the Central Bank. Although slightly weaker against the US dollar following the report, the Krone touched the highest level versus the dollar since early November on Wednesday.