A bullish menu was served last week, the main ingredients of which were constructive financial and oil data seasoned with a little bit of geopolitical tension. It was on sale for about $63 at the beginning of the week using Brent as a currency and it proved so popular that by the end of the week connoisseurs were prepared to pay as much as $67 for it albeit they lost a little bit of appetite on Friday.
If there was any doubt what the economic recovery and the consequent growth in global oil demand have been and will be relying on one just has to have a thorough look at last week’s stock market performance, especially in the US. The fast rollout of vaccination programmes and the resultant easing of mobility restrictions are already providing a solid base for optimism judging by the performance in the US equity markets. Nearly 195 million inoculations have been administered there and 30% of the adult population has been vaccinated. And the result? Retail sales were up by 9.8% in March, housing starts surged, new jobless claims dived by 193,000 to 576,00 for the latest reporting period ending April 10 and the labour market added 916,000 jobs in March. The main stock indices climbed into uncharted territory with the S&P 500 index gaining 1.37% on the week and the DJIA finishing 1.18% higher. Last week’s US performance has provided a foretaste of what to expect globally when the EU, India, Brazil and other regions in the world manage to get the infection rates under control and effectively roll out currently stuttering vaccination programmes.
The sous chef in the kitchen was China last week. It always bodes well for the oil market when the world’s second biggest economy shows no signs of illness. The country’s economic recovery picked up in the first quarter of the year and grew by 18.3% year-on-year aided by strong exports, government support and the increase of global vaccination. Net crude oil imports are forecast to rise by 3.4% this year to 559 million tonnes, according to CNPC whilst the National Statistics Bureau reported a jump of 19.7% in daily crude oil throughput last month from the comparable period of last year.
Favourable financial data unambiguously supports oil demand, and it was reflected in assorted weekly and monthly statistics and reports. Keeping in mind the strong signs of roaring US economy it will not come as a surprise that domestic consumption is healthy. Weekly data suggests that nationwide demand has broken over 20 mbpd, gasoline consumption is now flirting with the 9 mbpd mark whilst thirst for distillates jumped 500,000 bpd last week, over 4 mbpd. Rising demand usually leads to depletion in oil inventories. US commercial stocks lost 9 million bbls last week and they are 178 million bbls or 12% below the peak seen last July. Re-balancing is firmly under way.
Stock depletion is the buzz word not only in the US but in the entire OECD region. Last week’s monthly reports on global oil balance suggest that the drawdowns in oil inventories will continue this year. The second half of the year is expected to see a jump of 3.8 mbpd in global oil demand from the 2Q reading (IEA), subject to revisions based on the success of the ongoing fight against Covid. The call on OPEC will be 28.95 mbpd, 2.75 mbd higher than in the current quarter. OPEC and its allies will have wiggle room to further taper supply constraints in months to come and yet keep worldwide stock levels thinning if demand predictions prove accurate.
If the US and Chinese financial data was the appetizer, the upbeat 2H 2021 demand forecast the main course then surely Iran prepared the dessert. Just as indirect talks between the US and the Persian Gulf OPEC member about the potential return to the nuclear agreement started Iran has ramped up its enrichment of uranium to 60% as a response to a sabotage at its Natanz nuclear plants a week ago. The step will do nothing to strengthen the US commitment of re-instating the status quo that was upset by the former US President Donald Trump when he unilaterally abandoned the nuclear agreement in 2018 and Iran’s return to global oil export market has probably suffered a setback. The two main crude oil benchmarks settled $3.81/bbl (WTI) and $3.82/bbl (Brent) higher on the week.
On collision course
Although the relationship between equities and oil can be stormy at times there is no denying that higher stock markets are supportive, if anything, for oil, especially for the demand side of the equation. There was a thought-provoking piece in the Financial Times last week that foresees more fuel poured on to the bullish equity fire, at least on to one of its segments.
Equities can be categorized by sectors or by factors. It is the latter that is drawing budding interest. Investors tend to allocate funds to either value stocks (those that trade below their book value) or growth stocks (those that have the potential to outperform the wider market). These tend to display a negative correlation. Either of them could easily and quickly be added or thrown out of investment portfolios – after all when a growth stock reaches its potential it becomes unattractive or when a value stocks is in a long-term bull market it ceases to be undervalued.
Over the past few years, growth stocks have consistently brought better return than value stocks. Since November last year, however, the latter group has outperformed the growth sector and the negative correlation between the two sectors has flipped, a rare phenomenon. The 13% gain in Amazon November-to-date, for example, is dwarfed by the nearly 50% return Shell produced during the same period. Value stocks have become growth stock. The change in dynamic, investment managers tell the FT, will lead to rebalancing from tech to energy and industrial stocks. The DJIA could outperform Nasdaq. This, in turn, can provide indirect support for oil prices. Indeed, interesting times await ahead.