US Oil Production Reaches Fresh Cycle Highs

Daily Analysis - 02/03/2017

Output Accelerates Higher as Number of Active Drill Rigs Rises Further

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Capping off 8-weeks of gains, the latest US oil storage figures showed that the amount held in storage reached a new record last week while coinciding with another rise in oil production which reached the highest point since March of 2016, stoking concerns that the prevailing supply imbalance may not be easing.

US Oil Inventories Reach New Record


Echoing the API data reported a session earlier, official figures released by the US Department of Energy on Wednesday showed that US onshore crude stockpiles reached a new record for the week ended February 24th.  According to the Energy Information Administration, inventories rose by 1.501 million barrels, missing expectations of a 3.079 million barrel gain.

Besides marking the 8th straight week of growing stockpiles, the figures highlight that the glut in production remains intact despite the moves by OPEC to cut output, driving US inventories to 520.2 million barrels.  Furthermore, the build in storage was accompanied by a further uptick in US production which rose to 9.032 million barrels per day last week, lagging behind the continued climb in the active drill rig count.  After falling on Tuesday and Wednesday, Brent futures are extending losses on Thursday, trending towards $56.00 per barrel.

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US March Rate Hike Probability Surges


Following several more hawkish policy speeches from key officials within the Federal Reserve, the likelihood of a US rate hike during the FOMC Meeting in two weeks is now nearly double the level of a session earlier.  Although measures on the probability differ depending on the source, the CME Group now puts the chance of a 0.25% rate hike in March at 66.40%.  This coincides with the rise in the Personal Consumption Expenditures Price Index reported on Wednesday.

The Fed’s preferred PCE inflationary gauge rose to 1.90%, the highest point in 4-years, adding to the case for a more imminent action to normalize rates as the figure approaches the Fed’s 2.00% target. Even amid the rising rate hike speculation, stock benchmarks remained unfazed, with the Dow Jones Industrial Average closing at a new record on Wednesday.

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German Inflation Surpasses ECB Target


In another sign of the growing inflationary pressures across Europe ahead of the preliminary CPI figures due later in the session for the Euro Area, German consumer prices reported on Wednesday rose to the highest point since 2012.  Headline inflation rose to 2.20% during the month of February compared to the 1.90% reported during January, beating expectations while highlighting the growing pressure on the European Central Bank as inflation reaches the institutions 2.00% target.  The gains in inflation were primarily driven by rising food and energy costs for the period.

The EU Harmonised Index of Consumer Prices (HICP) also topped forecasts, reaching 2.20% and potentially adding to the case for the ECB to gradually reduce asset purchases.  In the meantime, the DAX 30 continues to gain ground, rising to the highest point since 2015 on Wednesday before pulling back modestly.

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Swiss Economic Activity Remains Anemic


In spite of highly accommodative monetary policy measures undertaken by the Swiss National Bank, the latest GDP figures for the fourth quarter reported by the State Secretariat for Economic Affairs missed the consensus estimate by a wide margin.  Gross domestic product came in at 0.10% growth for the final three months of 2016 compared to forecasts of 0.50% expansion.  On an annualized basis, growth fell to 0.60% from an upwardly revised 1.40% reported during the third quarter.

While household spending and government expenditures helped buoy the figure, weak investment and trade weighed heavily on the data, with exports falling by -3.80% during the fourth quarter compared to the third.  Even though the January trade figures displayed the biggest surplus in the country’s history, it remains to be seen whether the pickup will be reflected in first quarter GDP growth.

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