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Oil Inventory Growth Reverses

Daily Analysis - 06/05/2015

Massive Multi-Month Oil Storage Buildup Sees First Signs of Retreat

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After one of the fastest builds to oil inventories on record, US inventories look set to record their first decline in official Department of Energy data due later today. This comes on the heels of speculation that production will slow with the decline in operational drill rigs and increased refinery demand will spur further gains in oil prices.

Oil Gains on Inventory Draw

API crude oil stocks showed their first weekly decline in 4-months, with inventories declining 1.500 million barrels. Although unconfirmed until EIA data is released later in the session, Cushing facilities have seen some relief with the drawdown seeing 336,000 barrels leave storage. Oil prices continue to trend higher on the back of a pickup in demand as threats to oil transit routes raise the upside risks for prices. Increasingly aggressive behavior has forced the United States navy to escort any US-flagged commercial vessels through the Strait of Hormuz to prevent any possible conflict that could upset delicate nuclear negotiations. With US oil companies in Iran to discuss possible collaboration on projects hinging on completion of a nuclear deal, the possibility of sanctions being lifted could see substantial oil production hit the market in coming months, denting recent gains in prices.

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Greek Creditors Squabble

The creditors busy trying to negotiate a deal with Greece to save the insolvent nation have now turned on each other, demanding the other side take losses and haircuts on outstanding debt. The building disagreement between the European Commission and the IMF threatens the outcome of any Greek deal as creditors fight for scraps and to ensure they are repaid in full. Aside from the woes facing Greece, the ECB is encountering problems of its own as it seeks to meet its monthly asset purchase targets. The lack of liquidity and sellers in European sovereign debt means the ECB is forced to go ahead and focus on bonds with earlier maturities. However, in a boost to policies enacted, the European Commission raised Euro Area growth forecasts from 1.30% to 1.50%. European stocks were unimpressed with the upgrade, with the German DAX leading equity benchmarks to the downside, falling -2.51% in trading yesterday.

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Employment Data in the Wings

Today marks the first iteration of employment data due before nonfarm payrolls on Friday. The ADP nonfarm employment number is expected to show 200,000 jobs gained in April after 189,000 added in March. The prevailing trend in employment expansion remains downwards with increases decelerating. Even though ADP numbers are not necessarily good for predicting the official Nonfarm Payroll number on Friday, it does help confirm the trend in data. Any downside miss to expectations is likely to dent estimates for Friday which currently put consensus forecasts at 224,000 jobs. The improvement in initial jobless claims recently is a positive sign but could be more indicative that labor force participation continues to decline, with the figure presently ebbing at the lowest levels since the 1970s. The dollar continues to give up ground on weaker underlying fundamentals, trending lower against major peers.

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XAUUSD Equidistant Channel Technical Pattern

The persistent softness in the US economic data has seen gold prices benefit from the uncertain outlook for the future of interest rate policy. Although stuck in a fairly large $50 point range, the rapidly changing conditions in financial markets might beckon further gains in gold prices. The equidistant channel setting up in gold prices since the beginning of May exhibits a strong bullish bias but there are risks to the current trend. Today’s employment data and subsequent speech from Federal Reserve Chair Janet Yellen could see the dollar break higher on renewed hawkish jawboning. In the meantime, the prevailing strategy is to follow the channel to the upside, initiating positions at the lower channel line to be closed at the upper channel line. Any substantial reversal in the dollar could see gold prices breakout from the channel to the downside.

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