15/Apr/13 - 19/Apr/13
In the week preceding this, announcements form major
international energy organisations adjusting oil demand forecasts downward
caused a massive sell-off of the energy commodity, and the trend continued this
week as economic data continued to cause prices falls in WTI and Brent. Brent
lost -3.3% and WTI -3.6%, with Brent maintaining its premium as the spread
closed yesterday at $11.6, the same level it opened at on Monday. Notably Brent
closed below $100 on Tuesday for the first time since July, but failed to
maintain a rebound above $100 on Friday.
Weekly Summary
Weak economic data showing Chinese GDP growth failed to meet
expectations caused plunging Brent and WTI prices on Monday, with the grade
failing to rally in European afternoon trading as US data confirmed economic
weakness there as well. Due to the Chinese data, Brent opened in European
trading $0.4 below its previous close, and then continued to lose -1.9% in
trading. WTI meanwhile gapped down a similar amount but fell a larger -2.5% in
trading. Further demand forecasts were cut by the World Bank, which reduced its
growth forecasts for East Asia and warned of potential overheating, which would
require central banks to raise interest rates. While the sell-off caused Brent
to fall to its lowest close since August 2012, markets were more focussed on Gold
which lost a massive 10% in one day of trading. The fall was caused by a
bearish reaction to signs that indebted governments, such as Cyprus, may have
forced to sell hard gold assets in exchange for financial bail-outs.
Crude continued to fall overnight in Asian trading, and
Brent lost $1.7 from its Monday close to open in Europe at $99, similar to WTI
which lost $1.3 overnight. While the grades rebounded in European trading, with
Brent gaining 1% and WTI 1.5%, the earlier falls meant that Brent fell below
$100 for the first time in 9 months. The European within-day rebound was
similarly seen in other commodity markets, which may have been caused by a fall
in the USD and a feeling that the previous drop was too much too soon,
prompting some buyers to take advantage of the lower prices.
Such a move was ill-conceived however, and crude plummeted again
on Wednesday in a reaction to the weekly EIA release showing increasing
production and falling demand. For more details on the release, see my weekly
inventory post. Bearish sentiment also entered the market as US corporate
earnings came in at disappointing levels, and the USD strengthened from its
previous fall, gaining 1.3% versus the euro. The bearish report and negative correlations
with such currency gains caused Brent to fall -2.3% and WTI -2.4% on the day.
WTI and Brent had both closed below their lower Bollinger band
on Wednesday, which as the graph shows in previous sessions had caused a
next-day rebound which was demonstrated again on Thursday, prompted by further
technical support from the RSI being below the 30-mark (see my previous technical
trading post for more on the RSI). Such signs typically see buyers enter, even
if for short-term profits. Signs of longer-term profits were also seen as the
long bearish run raised the expectation that OPEC may begin to feel an output
cut is necessary. Venezuela is particular announced concerns on Thursday, and with
the country under political turmoil following a disputed election, there is a strong
incentive for the government to secure higher oil prices and thus budget
revenues. Despite the next OPEC meeting not being scheduled until 31st
May, prices could rise in the interim as Shell declared force majeure on its
Nigerian Light Bonny crude for pipeline repairs and data shows seaborne exports
from OPEC will fall in the four weeks to May 4. Rises in Brent and WTI could
have been higher were it not for economic activity indicators out of the US coming
in negative.
Reports that an ad-hoc OPEC meeting could be held boosted
Brent on Friday, but apart from that a lack of notable data traders had a comparatively
quiet day, with WTI falling a -0.4% and Brent up 0.2%. By the afternoon, OPEC
had denied the announcement and Capital Economics pointed out most OPEC nations
are comparatively healthy after recent high oil prices, and so urgency may not
be on the cards. PVM, an oil-broker, suggested that the week-end rally is
likely to have been caused by a closing of short positions before the weekend
and for profit-taking at the $100 mark, resulting in the North Sea blend
dropping back to close at $99.65.
Week Ahead
Next week will be quite data-heavy, with a number of global
data releases being released. In the US, everyday next week promises a release that
normally moves markets, with home data on Monday and Tuesday, goods orders on Wednesday,
the regular weekly jobs update on Thursday and a first-release of Q1 GDP data
on Friday. China will see its monthly PMI first release early on Tuesday, which
will be of particular note as the indicator has a high correlation with GDP,
therefore giving an indication of how Q2 GDP could develop. The euro area first-estimate
PMI will also be released after China’s, which could bring the euro zone back
into focus again, particularly with investors waiting to see whether the ECB
will engage in full-blown QE. This will be followed by the German IFO on
Wednesday, which gives an indication of business confidence the euro area’s
largest economy. On Thursday UK GDP data will be releases.
On a technical view, investors will be waiting to see
whether the current situation is a temporary retracement on a continuing
bearish run, or whether we have now hit the bottom and be aligned with
fundamentals. Some analysts say $85 would be an appropriate price for WTI,
while OPEC in particular may not be happy with less than $100 for Brent. Given
current fundamental infrastructure issues between the two grades ( see “On
a path to convergence”) mean a spread of closer to $10 than $15 is
appropriate, we’ll have to wait and see to find out which grades gives in. For
more detailed technical analysis, look out for tomorrow’s week-beginning
technical update.
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