U.S. jobs data provides support to oil benchmarks. Beware of being fooled

By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia

Mon, 08 Aug 2022, 10:54

U.S. jobs data provides some support to oil benchmarks. Beware of being fooled

Harry Altham

Energy Analyst, EMEA & Asia

Oil prices have started the week close to the six-month lows reached last week – WTI September 22 has fluctuated around this morning’s $89.01 open and is now printing at the day’s low of $87.94 (11:10AM BST). Last week’s U.S. jobs report took the markets completely by surprise, as 528k non-farm jobs were added in the month of July – far exceeding the 250k median estimate, while the unemployment rate fell to 3.5% (a 53-year low). In itself, this would suggest that the widely forecast economic downturn is not as close as many have expected, but the consequent effect on wage inflation leads us to believe that the Fed will continue to pursue aggressive rate hikes (controlling inflation is the Fed’s stated ‘top priority’). To that end, U.S. two-year yields jumped 15 basis points to 3.22% and markets are now predicting a greater likelihood of a 75 basis-point rise in benchmark rates at the Federal Reserve’s September meeting, having predicted a 50bp rise early last week. That considered, plus the evidence of weak U.S. gasoline consumption, leads us to believe that inflation (and rising interest rates) will dampen demand, and will provide a considerable impetus to a weakening of the calendar spreads – although front-month prices will continue to find support from tight fundamentals.

chinese imports rising, but disaggregation of available data shows weak demand

A weekend data release showing Chinese oil imports to have risen 4% to 9M bbd in July is lending further flat price support to oil markets this morning, although the winds of economic uncertainty within China continue to linger with some menace ahead of the new week. Though this is a month-on-month rise, last month’s imports (at 8.65M bbd) were the lowest they had been in four years and fell considerably short of the China’s 2021 average demand of 15.4M bbd (China also produces around 4.3M bbd, but these figures still show a considerable surplus). Indeed, Chinese refinery run rates (12.6M bbd in June), dramatically lower exports (771k bbd oil and product exports in June versus refined product imports of 220k bbd) and an inventory build of around 2.2M bbd (May) leads us to conclude that Chinese oil consumption is beneath 13M bbd which is 15% below 2021 levels. The demand outlook is also increasingly uncertain; China is recording rising COVID cases (807 on Monday) and maintains a strict zero-COVID policy, which has resulted in renewed lockdowns in several major cities (Haikou, on the island of Hainan, being the latest example). Weak economic data in July is likely to have resulted in softening oil consumption versus June. Further wobbles are likely to further weaken the backwardated structure of futures markets, particularly if China continues to build its inventories with cheap oil from Russia.

the net long falls further still

Last week’s Commitment of Traders Report showed the net long in WTI fell to its lowest level in two years, which was instigated by both a reduction in long positions and an increase in shorts. This comes amid collapsing managed money open interest in oil benchmarks; WTI’s fund open interest has fallen by 45% since January 2021 – which threatens to spur more volatility in oil markets. Further bearish sentiment comes from options markets, where the put skew in WTI as at its most bearish level since February. WTI’s support level is at $87.93, a level off which the benchmark has bounced this morning.

Source: CFTC, StoneX

Energy

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