Markets in Details: 24 April 2019

24 April, 2019

Power behind crude prices

Crude prices moved higher for the second session yesterday after Washington decided not to renew sanction waivers for countries buying Iranian oil: China, India, Japan, South Korea, Italy, Greece, Turkey, and Taiwan. As a result, Iranian oil production is expected to drop to around 600,000-800,000 bpd, which will worsen the supply issue caused by the seasonally high demand during the summer period. 

The commodity is strong on the trade talks. The U.S. and China are said to be getting closer to signing a deal. Since China is a major crude oil consumer, a growing Chinese economy would be a tailwind for the commodity. According to Reuters, China imported 10 million bpd in February, 21% up YoY.

WTI was trading as high as $66.58 on Tuesday and pulled back to $65.96, being just above the 23.6% Fibonacci retracement level on the API report on the inventory buildup of 6.86 million barrels for the week ending April 19. The EIA confirmed the supply build up, which is now at 11.3 million barrels since the beginning of the year, and OPEC’s spare capacity of 3.3 million bpd, adding that the cartel should be able to substitute for the Iranian barrels.

There are still signs of underlying weakness

China’s job market performed poorly in the first quarter. According to the latest CIER report, the number of new jobs in Beijing rose by 31%, but the demand for workers slumped 7%. This negative trend has prevailed for six quarters in a row due to the softening demand, and has started to affect companies and employment. This is in contrast to the economic growth and the statement made by China’s politburo that market confidence has returned. Perhaps this is exactly why the politburo said it would push the reform, rather than stimulus measures, as its economic plan is to move forward. Further slowdown would trigger a wave of defaults as China’s SOEs (state owned entities) have accumulated massive amounts of debt. The country’s corporate debt in the second quarter of 2018 was 155 of GDP, a level that the OECD refers to as unsustainable.

Asian trading on Wednesday revealed that tech names got under pressure after a string of negative earnings and outlook reports. Texas Instruments warned of persisting slow demand for microchips. Both Samsung Electronics and SK Hynix of South Korea fell more than a percent, dragging the Kospi index down for a day.

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