Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
Bad economic data in China is raising speculation that we will get a trade deal as the risks to the Chinese and global economy are rising. The fallout from the trade war is hitting China much harder that its trade partners, as a slew of bad economic data from housing to manufacturing and growth. Reports that China would hold talks with the United States on January 7-8, to look to find a way out of the trade war is coming, as China moved to cut Chinese bank’s reserve requirement ratios (RRRs), taxes and fees, to stimulate lending as the slowdown in the Chinese economy continues to accelerate. That is not to say that there are not any other casualties from the U.S. trade war, but other economies seem to be more resilient from the fallout. Germany, for example, saw unemployment fall to a record low in a report that showed that joblessness decreased by a seasonally adjusted 14,000 in December to 2.26 million, keeping the jobless rate at 5 percent.
The U.S. did see a massive drop in its manufacturing data. The Institute for Supply Management (ISM) reported its manufacturing index fell to 54.1% last month from 59.3%, the biggest one month drop since the Financial crisis in 2008. That caused a big sell off in stocks. Yet the data really fell from a high level and was driven down by a big drop in new orders. The index for new orders plunged by 11 points to 51.1, the weakest reading since August 2016, but still in expansion. The big drop in the ISM survey may have something to do with the end of the year and earlier buying to get ahead of sanctions. Besides, it overlooked a spectacular ADP/Moody’s jobs report that showed that private jobs rose by 271,000 in December, the biggest gain since February 2017 and brought the monthly average for 2018 to 203,000. That signals that despite the slowdown in manufacturing, the overall economy is still creating jobs and more than likely we will see the manufacturing data snap back in the new year. It will really snap back if the U.S. and China lay the ground work for a trade truce.
For oil this is also bullish because more stimulus by China, along with trade talks, could set the stage for an oil demand surge just as there are signs that supply is going to tighten. Not only did we see the American Petroleum Institute report a 4.5-million-barrel supply drop but a report from the Dallas Federal Reserve reported that growth in energy sector activity slowed significantly in fourth quarter 2018.
According to oil and gas executives responding to the Dallas Fed Energy Survey, the business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—remained positive, but barely so, plunging from 43.3 in the third quarter to 2.3 in the fourth. The company outlook index posted its first negative reading since first quarter 2016, plunging 57 points to -10.2 in the fourth quarter. This drop was particularly prominent among oilfield services firms, where the company outlook slumped 64 points to -17.2. The uncertainty index jumped 34 points to 42.4, pointing to heightened uncertainty regarding firms’ outlooks. Almost 58 percent of firms reported greater uncertainty.
This uncertainty will most likely lead to a pullback in the shale sector at a time when OPEC cuts are starting to bite. Reuters confirmed other reports about a big cut in OPEC oil output. Reuters said that OPEC pumped 32.68 million barrels per day last month, the survey on Thursday found, down 460,000 bpd from November and the largest month-on-month drop since January 2017. A formal accord by OPEC and its allies to cut supply in 2019 took effect only on Tuesday so they are ahead of the game.
But It wasn’t all bullish news. S&P Global Platt’s said that oil output and export data from Russia hit all-time highs in December. Russia, which was overtaken in September by the U.S. as the world’s biggest oil producer, saw crude and condensate production hit a record 11.45 million b/d in December, data from the country’s Central Dispatching Unit on Thursday showed.
The API also showed massive builds in gasoline and distillate supply, The API showed that gasoline stockpiles climbed by 8 million barrels, while distillate inventories rose by 4 million barrels. The data tempered the bullish crude draw and had folks wondering if everyone stayed home last week instead of traveling. Maybe Houston Shipping Channel screwed data. Weird. So, Stay tuned for jobs! Stay tuned for the EIA!
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