Oil finds fundamentals turning more bearish ahead of inventories

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Sam Ewing

After attempting to breakout through the upper range resistance level, all of the commodities in the oil complex failed and have been in retreat mode since early yesterday and into this morning so far. Crude oil has made a strong recovery since bottoming in the middle of April when WTI was trading in the mid- $80’s and Brent was down to about $97/bbl. As I have been discussing for the last two weeks the overriding fundamentals remain biased to the bearish side as global oil demand continues to show all of the signs that it is likely to slow in sync with the slowing global economy. The technicals have painted a different picture as a relatively strong short covering rally has occurred over the last several weeks.

Overnight the latest data point from the main oil demand growth engine of the world…China… was released and supports the prevailing view on oil demand. The China Federation of Logistics and Purchasing reported that its energy sensitive manufacturing PMI declined to 50.6 in April from 50.9 in March. Although the level is still above the so called expansion threshold of 50 this index has been gradually slowing suggesting that future economic growth may also follow and slow further.

The Agency said that export orders, prices and other indicators have also been slowing steadily. With the majority of the projected oil demand growth expected to come from China in 2013 the current data suggests that the projections for oil demand growth are likely to be ratcheted down again when the three oil forecasting agencies (IEA, EIA and OPEC) release their next round of forecasts beginning next week.

Staying with the macroeconomics today the ever important employment data cycle starts in the U.S. culminating with the release of the nonfarm payroll data. The industry is expecting a net gain of about 155,000 new jobs after last month’s disappointing 88,000 job gain. The headline unemployment rate is expected to remain steady at 7.6%... unless of course there is another notch down in the participation rate or simply more people giving up looking for jobs and thus making the employment rate look lower than it actually is.

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