Crude prices have bounced around, but in a fairly tight pattern over the last few days. In the brent futures market, there has been some selling pressure in the overnight market to see a strong open in the U.S. Once it bounces, it holds steady for the remainder of the day with not much fluctuation. I still believe we will see the brent market hold at $78-$84 with a trend keeping it at $81-$82. There are some near term events that will have impacts over the next few weeks.
- “OPEC+ will decide in March whether or not to extend voluntary oil production cuts in place for the first quarter.”
- Saudi has talked about being “frustrated” with cheating from member countries, but it’s unlikely they adjust or get rid of the heading into Q2.
- Russia’s Deputy Prime Minister Alexander Novak said it’s too soon to say whether voluntary output cuts by some OPEC+ nations will be extended beyond the first quarter, Interfax reported.
- The Red Sea issues aren’t going away in the near future, which will keep cargoes moving around the horn of Africa.
OPEC+ is facing a demand problem as economic pressures grow around the world. The biggest unknown will be the consumer as industrial activity isn’t showing any signs of a recovery. Instead, industrial activity has flatlined in contraction with some additional weakness in Europe and some parts of Asia. South Korea saw some recovery, but a lot of that is pent up demand from delayed purchases. India remains strong- even though it has slowed a bit- the country is still in expansion territory.
KSA will set their OSPs next week, and realistically- they should cut pricing- but I wouldn’t be surprised if they keep things flat. Here are the market expectations: “Saudi Aramco may keep the official selling price of its flagship Arab Light crude at $1.50 a barrel to Asian.” Armaco has grossly misplayed the OSP game, and they could create more demand without increasing production and instead cutting prices. This would provide more relief to the refiners, and keep flows moving into Asia. China has been importing more from the ME, and it would help keep volumes moving if KSA reduces OSPs.
As we discussed last week, Saudi crude exports were very strong in Feb increasing about 345k barrels per day, which put it at a high of 6.6M barrels per day. This is the largest increases since June 2023 or right before they rolled out the voluntary cuts. As refiners come back from maintenance in March, there should be some reduction of exports as 375k barrels of capacity start to come back online.
Even with the reduced refining volume from KSA, Russia’s monthly shipments of various types of fuel oils to Africa are on course to set a record in February, according to data from Kpler, reaching back to 2017. There has been a saturation of product in the market, and Russia has turned to dumping a bunch of it into Africa. This comes as China is expected to ship more diesel into the local Asian markets to help adjust the sizeable glut within the country. This will add to the exports already coming from India, and what I expect to increase from the Middle East over the next few weeks. “Russia plans to let its fuel producers resume exports of winter-grade diesel from late March as domestic demand for the product drops due to seasonality.” Russia plans to reduce some March diesel flows as well: “Russia plans to reduce daily diesel exports from its key western ports by 11% in March. Total’s Donges refinery on the west coast of France has been out of operation since Feb. 20 due to technical issues, local media reported, citing the CGT union.” On the flip side, “Russia’s Prime Minister Mikhail Mishustin approved a six-month ban on the export of gasoline”, RBC reports, citing people familiar with the decision. This isn’t a huge deal because there wasn’t a ton of gasoline being exported from the country already.
Russian crude exports stayed strong, and I don’t see a slowdown in the near term. “Russia’s four-week seaborne exports of crude rose to highest level in almost four months amid a surge in ESPO flows. Freight rates slid to the lowest so far this year. Chevron booked a VLCC to do an STS transfer off Malta.”
Even as crude spreads show some tightness, we aren’t seeing much by way of tightness when we look at shipping and refined product data.
- Prompt timespreads for diesel in Asia have narrowed to the smallest backwardation since December, indicating a weakening of bullish sentiment.
Freight isn’t showing any real change and refined products data is flipping into backwardation. While open interest in WTI and Brent fell to the lowest levels in several weeks.
India is an economy that has been holding in fairly strong in comparison to the rest of the world. Yet, there has been a sizeable increase in exports as we head into the end of February. There should be some slowdown on those exports based on seasonality, but the reductions will be made up from other regions.
There are also some increases in crude production as we look out into April.
- Angola plans to raise crude oil exports to 1.19m b/d in April, the highest tally since July
- April’s final program includes 37 cargoes, carrying a combined volume of about 35.6m bbl
- The final schedule adds one shipment each of Hungo and Pazflor crude for end-month loading, compared with the preliminary schedule released earlier this month that had 35 consignments
- Libya crude and condensate shipments bounded in Feb to over 1M barrels a day following the end to the protests in the country.
- Expectations are for 1.25M barrels per day
I think the market is still overestimating the amount of demand recovery that will happen in China and the U.S. Gasoline demand in the U.S. still remains well below “average” trends, and we are already starting to see prices creep higher. Prices will move up once again when “Summer Blends” start being shipped in Spring. This will be another driver of inflation as we head into Spring/Summer.
So far in China, gasoline demand has rebounded along 2023/2022 seasonal lines, but it will be important to see that continue back above 2023. As I described last week, we saw a nice bounce in activity, but spending still remained well below 2019 data.
This comes as diesel exports have increased and some internal expectations for demand get shifted lower. CNPC said: “China’s oil demand growth is expected to slow significantly this year as a post-pandemic recovery fades and adoption of new energy vehicles saps consumption, according to the nation’s biggest energy producer.” The main driver of this view is the slowdown in the local economy.
As crossing remain low through the Red Sea, some of the tightness in crude/product spreads will remain, but some of these recent moves in the paper markets are overdone: “Crossings remain historically low and we are running at low levels across dry bulk, LNG/LPG and Crude and there are no major signs of improvement.”
The big piece to watch in the U.S. is to see how refined product demand and storage levels play out during the current turn around. Implied demand in gasoline and distillate still remain weak, especially in the distillate market. Given the pressure in trucking, it’s unlikely we will get a meaningful reversal.
The below data for the U.S. shows how gasoline prices are starting to pick back up. This will be another headwind for the inflation market:
As we look at the economy, inventories are rising across the board (even when adjusted for inflation), which will keep a lid on shipping, trucking, and general logistics. It also shows that people aren’t spending to the same degree, and it will keep gasoline demand data under some pressure as we head into spring.
This comes as consumer sentiment started to turn lower, and I expect that to accelerate as inflation picks back up. Not only is it gaining momentum, but the comps to last year are getting easier. “Revised February Univ of Michigan Consumer Sentiment Index at 76.9 vs. 79.6 est. & 79.6 prior; Current Conditions fell to 79.4 vs. 81.5 prior; Expectations fell to 75.2 vs. 78.4 prior.”
As inflation picks up, it comes as underlying activity moves lower once again. Prices still remain elevated, and on the manufacturing front- they have moved back into expansion after spending some time lower. This comes as service prices paid have also turned higher once again. The below chart is a perfect example of stagflation. “February ISM Manufacturing PMI down to 47.8 vs. 49.5 est. & 49.1 in prior month; new orders fell to 49.2 vs. 52.5 prior; prices paid eased slightly to 52.5 vs. 52.9 prior … employment fell to 45.9 vs. 47.1 prior.”
The regional fed data continues to demonstrate more slowdowns with outlook for new orders being mixed. Some point to slowdowns while others have turned higher, but staying in contraction territory. “Now that we have Empire (blue), Philadelphia (orange), and Dallas (white) Fed PMI data in for February, looks like manufacturing activity is still in one long bottoming process.”
A concern for the Fed as we head into this months meeting is the acceleration of inflation. “PCE core services less housing jumped by 0.6% month/month (blue) in January (largest gain since December 2021) as year/year gain (orange) ticked up to 3.45%.”
This isn’t just a “one time increase” when you look at the bounce across core/ PPI/ and “Super Core.” In month/month terms, PCE deflator +0.3% vs. +0.3% est. & +0.1% prior (rev down from +0.2%); core +0.4% vs. +0.4% est. & +0.1% prior (rev down from +0.2%)
The infamous “Super Core Inflation” has reached the highest level since the end of the pandemic. “Super core inflation is reaccelerating. 0.596% mom gains is the second highest month basically ever.” These are some key areas that hit people the hardest- especially with food spending as a share of disposable income reaching levels not seen in 30 years.
Housing prices have also turned higher (once again), which will put a floor beneath “OER” and send things higher.
This all comes at the monetary base is actually increasing! I think there is a believe that QT has worked or is ending, which is far from the case.
“The US monetary base has been rising significantly recently. In the last 12 months alone, there has been a rise of $420 billion, primarily fueled by bank reserves. While the Fed should not classify this as QE due to mechanical differences, it unmistakably echoes the patterns of previous periods of monetary stimulus following the Global Financial Crisis. The economy’s reliance on easy-money policies has become akin to an addiction, rendering it incapable of sustaining itself without them. These are fundamental policy constraints that have yet to drive the value of hard assets significantly higher.”
This is part of the reason that we’ve seen easier financial conditions:
These key pieces are going to keep the Fed holding firm on rates, and “technically” there is enough data to say rates should go higher. I don’t think that is the likely case, but it will keep the Fed from cutting rates.
It will also keep credit card rates shifting higher (again) as credit card debt surges to highs.
A key piece to watch as we go forward remains- Core Service. Even when manufacturing pricing turned contractionary, the service side never flipped “deflationary” or at least “disinflationary.” Now- we are picking back up: “PCE core services less housing jumped by 0.6% month/month (blue) in January (largest gain since December 2021) as year/year gain (orange) ticked up to 3.45%.”
China put in some soft numbers for February, which is inline with our base case estimates.
China February official PMI
- Manufacturing PMI 49.1 [Est.49.1 Prev.49.2]
- Non-Manufacturing PMI 51.4 [Est.50.7 Prev.50.7]
- Composite PMI 50.9 [Prev.50.9]
- Caixin Manufacturing PMI 50.9 [Est.50.7 Prev.50.8]
I expect manufacturing to be a headwind, and it helps to demonstrate how all the stimulus has fallen flat.
“A state-owned firm in China’s Guizhou province is selling bonds to help repay debt issued by a local government financing vehicle, a rare move that highlights the region’s liquidity strains.
Guizhou Hongyingda Construction Project Management Co., a wholly-owned subsidiary of the finance bureau of Xixiu district in Anshun city, issued a 1.8 billion yuan ($250 million) five-year non-public bond Friday with a coupon of 4.8%, according to a filing on Shanghai Stock Exchange’s private disclosure platform seen by Bloomberg. The proceeds of the private note will go toward repaying or refunding two bonds sold by Anshun Xixiu Qiancheng Investment Development Co., an LGFV in the region, according to the prospectus seen by Bloomberg. Although based in the same district, Guizhou Hongyingda has no direct equity relationship with Xixiu Qiancheng Investment. “It’s extremely rare for a company to issue bonds for an entity without a direct equity relationship,” said Wang Chen, co-founder of Belt&Road Origin (Beijing) Tech Co., a provider of credit-risk analysis. “The move signals a new channel for LGFVs’ debt repayment. It will be conducive for debt-laden regions to help weak LGFVs in repaying debt, especially bonds sold in the open market.”[1]
Stimulus in China continues to fall flat as structural issues are going to take years to address. The market is expecting a “savior” to help prop up the economy, and the “buyers” of the past have disappeared. The Fed and China are tapped out, and as we progress through the year- Japan will come back into focus. They are already talking about “ending” their QE experiment by getting rid of the YCC (Yield Control Curve). Inflation has picked back up in the region, and where the experiment begin… so will it end!
