Oil Steadies Near 2-Week High

Daily Analysis - 20/07/2017

Energy Bulls Gain Ground after US Inventories Drop

Oil futures are holding their ground on Thursday after US government data showed a sizable drawdown in onshore crude stockpiles. Both Brent and West Texas Intermediate crude futures soared to their highest point since July 4^th on Wednesday despite growing domestic production that could weigh on prices down the road.

Brent Crude Precariously Poised

The latest Energy Information Administration report delivered on Wednesday showed that US crude inventories declined by 4.727 million barrels during the week ended July 14^th following substantial declines the prior two weeks. US oil inventories have now fallen in 13 of the past 15 weeks. However, Brent crude continues to remain below the key psychological mark of $50.00 per barrel. Persistently high supplies from the Organization of the Petroleum Exporting Countries, despite a pledge to curb output, have failed to tighten the bloated market.

Furthermore, US oil production hit a fresh cycle high, posing additional risks to the outlook. Brent crude futures are currently trading around $49.70 a barrel, with $50.20 representing the immediate resistance on the upside. Any close above that level will complete the formation of a bullish head and shoulders pattern, potentially targeting $52.50 a barrel.

Bank of Japan Keeps Policy Steady

The Bank of Japan kept its monetary policy strategy unchanged on Thursday, but cut its inflation forecasts for fiscal years 2017-18 and 2018-19, pushing back the timeline to achieve its 2.00% inflation target to fiscal 2019. The Central Bank now expects inflation of around 1.10% for the current fiscal year, down from an earlier projection of 1.40%. For the next financial year, inflation is forecast to hit 1.80%, compared with earlier expectations of 1.90%.

The benchmark overnight interest rate was held steady at -0.10%, with a pledge to cap 10-year bond yields at “around zero.” Overall, the BoJ sounded more upbeat about the state of economy, lifting its gross domestic product estimates for the current and next fiscal years to 1.80% and 1.40% respectively. USDJPY is gaining in Thursday morning trade to currently hover around 112.050.

US Housing Starts Rebound

Groundbreaking activity in the United States jumped to a four-month high in June, buoyed by strength in the Northeast and Midwest regions. Housing starts surged 8.30% to a seasonally adjusted annual pace of 1.22 million units - the highest since February - with both single and multi-family construction rebounding after three straight months of declines according to the Commerce Department. Year-on-year, starts rose 2.10%, outpacing economist estimates of a 1.16 million-unit rate in June.

The May sales figure was revised higher from the previously reported 1.09 million units to 1.12 million units. Building permits, a key indicator of future construction activity, soared 7.40% to a 1.25 million-unit pace in June, with approvals for multi-family homes rallying to a five-month high. With the tailwinds from housing, the S&P 500 closed at a fresh record on Wednesday, with futures last trading around the 2470-mark.

Euro Area Construction Output Shrinks

Construction output in the Euro Area contracted in May, marking another tepid month for the sector. Month-over-month output fell -0.70% in May – the second contraction in the past three months. On an annualized basis, output gained 2.60%, down from the 3.30% pace recorded back in April. The building sector shrunk by -0.60% for the month, while civil engineering contracted by -0.90% per figures compiled by Eurostat. Output declined in Germany, France and Spain, but expanded in Italy – the currency bloc’s third biggest economy.

The wider economic recovery in the region has gathered momentum since the start of the year, with second quarter growth forecast to accelerate from the 0.60% rate reported at the beginning of the year. After opening higher, DAX 30 futures are giving up earlier gains, with the index last seen trending near 12485.