“Monday, Monday, can’t trust that day.”
Global markets are off to a shaky start in a week that includes a Fed meeting, a BoJ meeting, and some key economic data out of the US. As Deutsche Bank’s Joseph LaVorgna writes in a note from the future (note the highlighted commentary in the image below), “Friday's Q2 GDP and employment cost index (ECI) reports are potentially very important for the intermediate-term monetary policy outlook, and the Fed will have neither when its meeting is completed on Wednesday.”
We always knew LaVorgna was a weatherman but were unaware he was also a time traveler.
Anyway, it’s all moving in the wrong direction. The yen’s hovering below 106 despite expectations for something spectacular from Kuroda on Friday, European shares closed mixed as did Asian markets where investors were apparently spooked by the realization that while fun, virtual Pokemons actually aren’t very profitable.
Frankly, it’s kind of a snoozer of a day but you do want to note oil, which is now sitting near a three-month low:
The strong dollar isn’t helping and sentiment seems to be turning negative again after a rather premature bout of euphoria that prevailed during the bounce of the January lows. Have a look at positioning:
(Chart: Deutsche Bank)
As Bloomberg notes, traders are now the least net long they’ve been since March.
So what’s going on? Well, it’s a supply/demand story (imagine that). Refiners are sitting on too much gasoline as the summer driving season moves into the later innings. Here’s Bloomberg summarizing a note out Sunday from Morgan Stanley:
“Analysts foresee ‘worrisome trends’ for oil supply and demand, led by refineries generating too much gasoline in recent months. Faced with the need to cut back on capacity utilization to protect profit margins, these refineries are set to crimp crude oil purchases and drag prices lower.”
And then this morning we got this from Citi:
“Brent and WTI spot prices have retraced to the mid-$40s as some of the 2Q’16 investor optimism has cooled and the seasonal support usually supplied by firming gasoline cracks has been lacking. Refinery margins are under pressure due to falling gasoline cracks as strong gasoline demand growth has been met by even stronger refinery supply. In addition, the elevated levels of crude and petroleum product in tank which will likely keep oil prices trading in a range-bound environment in the near term.”
Finally, here's Goldman on the refiners:
“Refining fundamentals and stock performance have been challenged by a combination of: (1) oversupplied gasoline/diesel markets, despite strong global product demand; (2) tight crude differentials; (3) lower capture rates; and (4) higher RINs expenses. Despite the sharp YTD sell-off (-45% vs. XLE +13%, S&P +6%), we still believe it is too early to get broadly positive on refining equities until consensus EPS estimates re-calibrate. We see 14%/20% median downside to 2016/2017 Street estimates, with 10 of 13 refiners missing on 2Q EPS.”
So you’re saying this is a refining story?
This is another one of those moments when you realize that you don’t need to be an analyst to see things coming a mile away. Obviously, inventories weren’t falling…
(Chart: Credit Suisse)
...and we know refiner demand slips by something like 1 million b/d as the summer driving season winds down. So, yeah this was pretty well telegraphed.
And while all of the above pretty clearly paints a bearish picture for crude, just remember that the easiest thing to do when forecasting is to take both sides of the argument simultaneously. That way, you’re never wrong.
Just ask Citi who slapped the following title on the note excerpted above: “A midsummer nightmare for prices does not derail bullish dreams.”