Strong ISM Data Failed To Support Oil, WTI Closed Below 70

Crude oil price sank -2.7% to close at 68.05 Tuesday, the lowest settlement since August 17 as driven by decline in equity markets and strength in USD against the euro. Others in the energy complex also plunged with RBOB gasoline losing -1.5% to 1.78 and heating oil dropping -2.7% to 1.76. Natural gas price continued to find the bottom and slumped -5.2% to 2.82 yesterday.

Economic data released in the US were stronger than expected but the positive impact to commodity prices and stock markets was short-lived. ISM manufacturing index surged to 52.9 in August, better than consensus of 50.1, from 55 in the prior month. This was also the first in 19 months that the gauge reached expansionary territory and 52.9 was also the highest reading since June 2007. Look into the breakdowns, ‘new orders’ and ‘production’ components showed strong improvement although ’employment’ and ‘inventory’ components remained sluggish. Pending home sales gained +3.2% mom in July after rising +3.6% a month ago. The reading also beat market expectation of a +1.6% gain.

The data did push WTI crude oil price to as high as 71.37 and Dow Jones Industrial Average above 9550. However, investors probably worried about the sustainability of economic recovery and decided to take profits upon good news.

Selling pressure in crude oil eased slightly after the industry-sponsored API reported huge draw in crude and gasoline inventories. Crude oil stockpile declined -3.19 mmb (consensus: -0.33 mmb) to 343.5 mmb in the week ended August 28 as surge in refinery runs outpaced increase in imports. Cushing stockpile also fell -0.4 mmb in the week. Gasoline stockpile dropped -2.81 mmb to 206.9 mmb despite rise in refinery runs while distillate inventory rose +0.92 mmb to 161.8 mmb.

Traders often use API data as guidelines for EIA’s report. Consensus forecast that crude inventory drew -0.9 mmb in the week ended August 28. Gasoline stockpile probably also declined -0.9 mmb while distillate inventory rose +0.78 mmb.

Both we and the market are surprised by the Chinese government’s announcement on fuel price hike as press in China has just said last week that the government might delay price adjustment. The NDRC announced on September 1 that ex-refinery prices of gasoline and diesel are raised by RMB 300/ton to RMB 6810/ton and RMB 6070/ton respectively. This is the 6th time that the NDRC has adjusted prices since the new pricing system was introduced in December 2008.

Same as the case in early June, the price hike this time is smaller than what has been anticipated by the market. According to the government, the price increase came in less than what was suggested by the pricing mechanism because of China’s current economic status. We believe the Government does not want to affect consumers’ affordability and at the same time tries to curb speculations.

The precious metal complex ended the day with mixed results. While gold and silver prices added +0.3% and +0.9% to 956.5 and 15.06 respectively, both platinum and palladium lost -1.4%. Gold’s rise despite USD’s strength and stock markets’ decline was against recent pattern that is gold gains as USD drops and stocks rise. News attributed USD’s strength to investors’ demand for safe-haven investment. Now, gold rises in tandem with the dollar and against stocks, we suggest monitoring this pattern and seeing if it persists. If so, then it means gold’s appeal as safe-haven asset returns.

US Oil Inventory

Comparison between API and EIA reports:

API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department (EIA)for its weekly survey.  Oil inventories from the API and EIA moved in the same direction for over 70% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA