Oil Inventories Snap Back

Daily Analysis - 31/12/2015

US Crude Stockpiles Climb in Latest Inventory Reading

In sharp contrast to the prior week’s reading, crude oil inventories grew by 2.629 million barrels in the latest measuring period compared to the earlier -5.877 million barrel drawdown according to the EIA. With global inventories filling rapidly, more pressure is on the way for crude oil prices over the medium-term as storage concerns mount.

Cushing Fills Further

The latest reading from the Department of Energy showed a surprising increase in US crude oil inventories in spite of December typically being a period of pronounced drawdowns as companies seek to take advantage of year-end tax benefits. According to the figures, US crude oil production unexpectedly rose last week to 9.202 million barrels while the Cushing storage facility saw an additional 900,000 barrels placed in storage, bringing the total to 63 million barrels out of 85 million barrels of total storage capacity. Hurting the outlook for crude oil prices further is the filling of global onshore facilities which currently numbers slightly less than 1.200 billion barrels in storage, not far from estimates of 1.400 billion in total global storage space. Crude prices fell on the announcement with WTI falling as low as $36.40 before rebounding modestly.

Pending Home Sales Slip

Concerns over the impact of higher interest rates are beginning to manifest as evidenced by the latest pending home sales figure which fell by -0.90% for November versus 0.40% recorded in October. On an annualized basis, pending home sales have risen by 2.70% compared to November of 2014, but the gains are marginal compared to prior years, heightening expectations of a potential correction in the sector. While NAR has attributed the weakness in certain housing figures to more compliance requirements before closing, the possibility of rates rising further over the medium-term have some realtors concerned about surging borrowing costs for potential buyers hampering sales. Not helping sales are rapidly rising prices as evidenced by the latest Case-Shiller home price index reading which have impacted the affordability of home purchases for many buyers amid a supply shortage and higher demand.

Markets Grind Sideways

Directional momentum has been largely absent from financial markets as the end of the year approaches. Currencies in particular have seen both trading volumes and volatility drop dramatically as profit-taking and year-end window dressing run their course. With traders avoiding new risk, aggressive positioning is not suggested especially with the weekly reopening expected to start with a bang and unlike the year ending with a whimper. Equities did see some volatility in the prior session with major US benchmarks flash crashing right around the close of the cash equity session, led lower by the Nasdaq Composite erasing most of the prior session’s gains, tumbling -0.82% followed by a -0.72% loss in the S&P 500 and a -0.66% decline in the Dow Jones Industrial Average. The US dollar remained mixed versus peers with typical correlations breaking down in the absence of trading volume.

Happy Holidays From Alvexo

As 2015 comes to a close, it is important to be reminded of the volatility inherent in holiday sessions. The last few days have seen notable price swings, especially in stocks and commodities as the year closes out. Much of Europe will be closed for the session as New Year approaches with the United States shutting down financial markets later in the session. 2016 is likely to see a lot of changes in financial markets thanks in large part to the divergent monetary policies currently being implemented. With many advanced economies forecast to leave policy at very accommodative levels, the move by the Federal Reserve to begin raising rates could have a global impact from currencies to equities to commodities. Deflation is likely to remain a major theme in 2016 with Central Banks employing all possible tools to prevent this phenomenon from trapping sovereign economies in a downward spiral.