Quote of the Day
The language of friendship is not words, but meanings.
Henry David Thoreau
Oil prices are mixed in overnight trading after a supportive API oil inventory report that has been offset by yet another sign that the main economic and oil demand growth engine of the world… China is slowing. The latest manufacturing data out of China weakened more than expected for July. The HSBC/Markit reading came in at 47.7 or solidly below the expansion threshold of 50. The PMI data is an energy sensitive Index and with China in the contraction mode it certainly suggests that oil demand growth out of China is likely to be less than has been forecast so far.
On the other side of the world the Eurozone manufacturing index actually came in better than expected for July led by strong growth out of Germany. For the first time in two years the Index came in at 50.1 or above the expansion threshold and above the 48.8 level from June. This could be an early sign that the EU economy may finally be starting to bottom and beginning to work its way out of recession.
The Brent/WTI spread is back on the defensive so far this morning after a modest short covering rally over the last day or so. The spot September spread has narrowed to a $70/bbl premium of Brent over WTI after trading well over the $1.50/bbl level yesterday. Last night’s API data showed another large draw of 2.1 million barrels from Cushing strongly suggesting that the destocking pattern that has been in play for the last month or so is likely to continue. Cushing stocks are still above normal but now stand at the lowest level of the year.
I view the activity over the last few days as primarily a short covering rally and not yet a structural change in the narrowing trend of the spread that has been in play since February of this year. The spread has already hit parity and actually traded with WTI at a premium to Brent on an intraday basis on both Friday and Monday. I expect the narrowing trend to remain in place.