Oil touches multi-year high with tight supply and Iran sanctions

Global Stock Markets

Oil prices hit a 3-1/2-year high on Tuesday, supported by tight supply and planned U.S. sanctions against Iran that are likely to restrict crude oil exports from one of the biggest producers in the Middle East. 

Brent crude oil LCOc1 reached $79.22 a barrel, up 99 cents and its highest since November 2014. By 1100 GMT, Brent was up 90 cents at $79.13. U.S. light crude was 60 cents higher at $71.56 a barrel, also close to its highest since November 2014.

World oil prices have surged by more than 70 percent over the last year as demand has risen sharply but production has been restricted by the Organization of the Petroleum Exporting Countries, led by Saudi Arabia, and other producers including Russia.

Now the United States has announced it will impose sanctions on Iran over its nuclear programme, raising fears that markets will face shortages later this year when trade restrictions come into effect.

In China, the world’s biggest oil importer, refinery runs rose nearly 12 percent in April compared with the same month a year ago, to around 12.06 million barrels per day (bpd), marking the second-highest level on record on a daily basis, data showed on Tuesday.

The tightening market has all but eliminated a global supply overhang which depressed crude prices between late 2014 and early 2017.

OPEC figures published on Monday showed that oil inventories in OECD industrialised nations in March fell to 9 million barrels above the five-year average, down from 340 million barrels above the average in January 2017.

U.S. crude is trading at a hefty discount to Brent, the international marker, thanks to sharp rises in

U.S. production to 10.7 million barrels per day, which has left the American domestic oil market well supplied.

U.S. shale oil production is expected to rise by about 145,000 bpd to a record 7.18 million bpd in June, the U.S. Energy Information Administration said on Monday.

The Permian basin in Texas, the biggest U.S. oil patch, is expected to see output climb 78,000 bpd to a fresh record of 3.28 million bpd.

Little Hint of trade Tussle dread in European Valuations

European Equities

As Donald Trump’s ‘America First’ trade agenda turns from steel imports to Asian technology and intellectual property, a global trade war is now seen as the most serious risk for global investors, according to a recent survey. 

 

The growing protectionist rhetoric has helped push Europe’s Stoxx 600 index down more than 2 percent this week. Tech stocks have fallen furthest, not helped by the scandal over misuse of Facebook users’ personal data. 

For now, though, the reaction of European industrial stocks that could suffer most in a real trade war does not convey a sense of panic. 

An index of the region’s industrial companies .MIEU0IN00GEU fell sharply in early March when the U.S. President proposed import tariffs on steel and aluminium. Since then they have recovered and performed largely in line with their U.S. peers .MIUS0IN00PUS. 

The next test comes later on Thursday, when Washington is expected to unveil up to $60 billion in new tariffs on China targeting technology, telecoms and intellectual property. 

Edmund Shing, head of equity derivatives strategy at BNP Paribas, notes that U.S. investors have been investing a lot more in foreign equities and emerging markets recently.

This, said Shing, is because investors think Trump’s tariff moves are a negotiating tactic to secure better terms with the European Union, China and NAFTA partners “as opposed to a particular desire to ratchet up on actual tariffs per se”. 

Goldman Sachs said we are “probably approaching peak trade risk in the near-term”, while Citi analysts reckon the recent growth in world trade will overcome the impact of tariffs. 

They point to figures showing strong growth in global goods trade volumes in 2017, and note that trade growth has now surpassed global GDP growth once again. 

“For now, our base case is for moderate increases in global protectionism and for these to mostly remain targeted at specific sectors,” they wrote. 

Shares in European industries in the firing line of a potential trade war took a hit on March 2 after Trump proposed the steel and aluminium tariffs, and steelmakers have continued to weaken: 

But U.S. aerospace companies have underperformed Europe’s - possibly reflecting the higher risk of trade retaliation damaging U.S. defence exports. Boeing jets have often been cited as a potential target by China, which has been developing the C919 as part of its civil aerospace ambitions. 

Automakers - big consumers of steel - have had a mixed run, but two of the European manufacturers most exposed to the United States - BMW and Fiat Chrysler - are trading back where they were before Trump’s tariff announcement. 

The chart below shows European aerospace and autos stocks (purple and blue) have recovered from sharp losses after the Trump announcement to slightly outperform their U.S. counterparts (orange and green). 

“Risks (for the auto industry) are mitigated somewhat by high use of locally produced (c80%) and recycled (c40%) steel,” Citi analysts said in a note on trade war risk. 

The relative resilience of European industrial stocks can’t be explained by an improving economic picture. Euro area PMI data - a key indicator of industrial sentiment - saw their sharpest monthly fall in six years at the end of February, while comparable U.S. indicators are on the up. 

Economists see only a small impact on the global economy of the higher U.S. steel and aluminium tariffs. But a full-blown trade war would be something else. 

The OECD projects that a permanent 10 percent rise in trade costs would lower global gross domestic product by 1-1.5 pct in the medium term, in figures cited by Citi analysts. 

European drinks maker shares dropped when Trump’s steel move prompted the European Union to threaten higher tariffs on imported American whiskey. 

Simon Hales, Citi’s EMEA beverages analyst, said any EU retaliation around imported American whisky could prompt U.S. retaliation targeting imported EU spirits.

But for now investors appear to be taking that in their stride

Global oil demand picks up but still lags rising supply: IEA

Global Stock Markets

Global oil demand is expected to pick up this year but supply is growing at a faster pace, leading to a rise in inventories in the first quarter of 2018, the International Energy Agency (IEA) said on Thursday. 

The IEA raised its forecast for oil demand this year to 99.3 million barrels per day (bpd) from 97.8 million bpd in 2017. 

Commercial oil inventories in industrialized OECD nations rose in January for the first time in seven months to 2.871 billion barrels, 53 million barrels above their five-year average, the Paris-based IEA said. 

The January increase of 18 million barrels over the December inventory level was roughly half the size of rises normally seen at this time of year, according to the agency, which advises Western governments on energy policy. 

But it said Venezuela, where an economic crisis has cut oil production by 50 percent in two years to lows not seen in more than a decade, could still trigger a renewed drawdown in stocks.

In a bid to drain inventories, the Organization of the Petroleum Exporting Countries, Russia and several other producers have been implementing a deal to cut output by about 1.8 million bpd from January 2017 until the end of 2018. 

Assuming no change in OPEC output for the rest of the year, the IEA said it expected a small increase in OECD inventories in the first quarter of 2018 with declines after that. 

The agency said it expected supply from non-OPEC nations to grow by 1.8 million bpd in 2018 to 97.9 million bpd, led by the United States, where crude output was forecast to rise by 1.3 million bpd during 2018 to more than 11 million bpd by the end of the year. 

OPEC crude output fell in February to 32.1 million bpd, led by Venezuela and the United Arab Emirates. 

The IEA raised its estimate for demand for OPEC oil to 32.4 million bpd for 2018 from last month’s forecast of 32.3 million bpd. 

The agency said the decision by U.S. President Donald Trump decision to impose tariffs on imports of steel and aluminum, which has prompted threats of retaliation from major trading partners, posed a risk to global economic growth forecasts. 

It said growth in world trade had been strong, accelerating from 2.5 percent in 2016 to 4.7 percent in 2017, citing this as the likely reason behind a sturdy 1.8 percent rise in 2017 in global gasoil demand.

Oil climbs up: U.S. drilling activity reduced, booming job market

Oil Stock Markets

Oil markets edged up on Monday on the back of a drop in the number of U.S. rigs drilling for more production and as the U.S. economy continued to create jobs, which industry hopes will drive higher fuel demand.  

U.S. West Texas Intermediate (WTI) crude futures CLc1 were at $62.10 a barrel at 0407 GMT, up 6 cents, or 0.1 percent. 

Brent crude futures LCOc1 were at $65.58 per barrel, up 9 cents, or 0.1 percent, from their previous close.

The U.S. economy added the biggest number of jobs in more than 1-1/2 years in February, with non-farm payrolls jumping by 313,000 jobs last month, the Labor Department said on Friday.

In oil markets, U.S. energy companies last week cut oil rigs for the first time in almost two months RIG-OL-USA-BHI, with drillers cutting back four rigs, to 796, Baker Hughes (GE.N) energy services firm said on Friday.

Despite the lower rig count, which is an early indicator of future output, activity remains much higher than a year ago when, when just 617 rigs were active, and most analysts expect U.S. crude oil production C-OUT-T-EIA, which has already risen by over a fifth since mid-2016, to 10.37 million barrels per day (bpd), to rise further. 

That’s more than top exporter Saudi Arabia producers and almost as much as Russia pumps out, at nearly 11 million bpd.

Singapore-based brokerage Phillip Futures said that the oil market will focus on OPEC and IEA (monthly) reports this week for a sensing on global demand/supply levels for crude oil and that items in focus will include OECD commercial stock levels, revision in global demand and supply for crude oil and OPEC’s compliance on production levels.

The Organization of the Petroleum Exporting Countries (OPEC), together with a group of other producers led by Russia, has been withholding production since the start of 2017 to prop up prices.

Global growth headed for six-year high: OECD

The global economy is on course this year for its fastest growth in six years as a rebound in trade helps offset a weaker outlook in the United States, the OECD forecast on Wednesday.

The global economy is set to grow 3.5 percent this year before nudging up to 3.6 percent in 2018, the Paris-based Organisation for Economic Cooperation and Development said, updating its forecasts in its latest Economic Outlook.

That estimate for 2017 was not only a slight improvement from its last estimate in March for 3.3 percent growth, but it would also be the best performance since 2011.

Yet despite this brighter outlook, growth would nonetheless fall disappointingly short of rates seen before the 2008-2009 financial crisis, OECD Secretary General Angel Gurria said.

While recovering trade and investment flows were supporting the improving economic outlook, Gurria said barriers in the form of protectionism and regulations needed to be lifted to ensure stronger growth.

The improvement would also not be enough to satisfy people's expectations for better standards of living and reduce growing income inequality, he said.

The OECD saw an improved global outlook even though it downgraded its estimates for the United States, despite a weaker dollar boosting exports and tax cuts supporting household spending and business investment.

The OECD forecast U.S. growth of 2.1 percent this year and 2.4 percent next year, down from estimates in March of 2.4 percent and 2.8 percent, respectively.

OECD chief economist Catherine Mann attributed the downgraded outlook to delays in the Trump administration pushing ahead with planned tax cuts and infrastructure spending.

The weaker U.S. outlook was offset by slightly improved perspectives for the euro zone, Japan and China.

OECD sees China growth slowing to 6.5 percent in 2017, 6.3 percent in 2018

China's economic growth is likely to slow to 6.5 percent this year and cool further to 6.3 percent in 2018, the OECD said, though exports are set to pick up as global demand strengthens.

The Organisation for Economic Co-operation and Development also warned of China's ballooning corporate debt in its bi-annual economic outlook report released on Tuesday.

China's corporate debt is about 175 percent of GDP, one of the highest in emerging market economies, he said, with state-owned enterprises (SOEs) accounting for around 75 percent of that.

Such guarantees have enabled SOEs and local government investment vehicles to continue accumulating debt, she said.

Financial risks in China are mounting because of indebted enterprises, growing non-bank activities and enormous overcapacity, the report said.

The OECD's forecast for 2017 is in line with the Chinese government's growth target of around 6.5 percent this year, versus last year's 6.5-7 percent range. The economy grew 6.7 percent in 2016, the slowest pace in 26 years.

Some analysts believe the more modest target will give policymakers more room to tackle debt risks and push through painful reforms, though authorities are expected to proceed cautiously to avoid hurting growth.

Economic growth remains high "but is gradually and appropriately moderating as the population ages and the economy rebalances from investment to consumption," the report said.

Export volumes are expected to grow 3.4 percent this year and 3.3 percent next year, up from 2.3 percent in 2016, due to increasing global demand.

The world's second-largest economy needs more innovation, entrepreneurship, effective corporate governance and reform of its state-owned sector, the OECD added.

The report did not single out the threat of rising protectionism from the United States but noted that protectionism by some trading partners would hurt Chinese exports