Oil driven lower on weaker demand, strong dollar

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The growing market concern over the weakening oil fundamental picture is continuing to pressure oil prices with the complex declining for the fourth trading session in a row. The fact that the U.S. Dollar Index was also strong yesterday contributed to the selling in the oil pits. The rally in equity markets — normally a positive driver for oil prices — was largely ignored with the strong U.S. dollar and prospects for weaker demand turning out to be the main negative price drivers for the complex.

It is interesting in that often times the market discounts the nearby oil fundamentals and tends to focus on the externals, which normally present a forward or perceived view of the future fundamentals. However, over the last week or so the market has become much more focused on the current fundamental picture, which is becoming more and more bearish. As I have been discussing in the newsletter, supply is robust and growing, global oil demand is faltering and U.S. inventories are at the highest level since the 1930s.

On the economic front Germany’s economy expanded less than expected while France fell into recession for the first quarter. France’s economy contracted 0.2% quarter on quarter for Q1 after a 0.2% decline in Q4. The Eurozone reported a decline of 0.2% on a quarter on quarter basis for Q1 vs. a market consensus of 0.1%. Europe’s economy continues to weaken suggesting that oil demand in the region will also weaken going forward.

After spending a week below the key technical support area of $8 to $8.25/bbl the spot Brent/WTI spread was hit with a mild round of short covering which accelerated after the API reported a 541,000 barrel build in Cushing inventories along with a 750,000 barrel crude oil build in PADD 2. The API and the EIA have been relatively consistent in their assessment of Cushing inventories. As such I expect the EIA Cushing number to be in sync with Tuesday’s API number. This is the first build in Cushing crude oil stocks in a month and could be an early turning point from the destocking pattern that has been in play in Cushing for most of the last several months.

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