Ole Hansen
Saxo Bank’s head of commodity strategy Ole Hansen considers the implications of pledges by Saudi Arabia and Russia to raise oil production despite the likes of Iran and Venezuela not backing the move.
Article / 19 August 2016 at 5:01 GMT

3 Numbers: Crude spurt not over as rig counts expected to rise

Blogger / MoreLiver's Daily
  • German producer prices to rise the fourth month in a row
  • UK’s public sector net borrowing to fall in June – no Brexit damage here
  • US oil and gas rig count rising in sync with the oil price

By Juhani Huopainen

Today’s data calendar is quiet, and the focus of investors is already being nailed toward next week’s Jackson Hole symposium and the August flash purchasing manager indices, which will be published on Monday.

Yesterday, the UK’s July retail sales growth exceed expectations and GBPUSD rallied – but it is still remaining within the post-referendum range.

Germany July Producer Price Index (0600). German producer prices still remain depressed. Prices in July are expected to have fallen by 2.1% from year ago, and even core price change, which excludes energy, is firmly negative.

The monthly price changes are promising – an increase of 0.2% in July is expected, following a gain of 0.4% in June. July would be the fourth month in a row of rising prices, because of higher oil prices.

As long as the manufacturing sector’s revenue and margins are not seriously dented by lower prices, there is little interest among the German decision-makers to react to the lower producer prices.

 Extraction action: US oil rigs are multiplying as the oil price moves up again. Photo: iStock

UK July Public Sector Net Borrowing (0830). As both the consumer price index, retail sales and unemployment have been better-than-expected, perhaps today’s usually less interesting data release will be of some interest to GBP traders.

In June, the net borrowing was GBP 7.8 billion, and the consensus forecast is that the net borrowing will diminish to a negative GBP 1.6 billion – in effect, the public sector is running a surplus.

Unfortunately, this seems to be a seasonal issue, as the past four Julys have registered a smaller-than-usual net borrowing number.

UK public

Investors might still happily take the number as a GBP-positive, either because of a misunderstanding the seasonality, or because a number in line with the past patterns is still positive news after all the scaremongering over the Brexit.

US Weekly Baker Hughes US oil and gas rig count (1700).
The oil and gas rig count rose to 396 in the previous week. In theory, a higher rig count means supply is increasing, which should depress oil prices.

Fortunately, the rig count increases have been relatively small and the rig count remains at modest levels.

After topping out in late 2014, the rig count has been falling more or less constantly until May 2016, following the oil price. At that point the rig count found a bottom, again after oil price.

US rig
 Chart source: Saxo Bank

Before the oil price started seriously rallying around 2004, the rig count tended to oscillate around 200-400 levels during the nineties.

Rig count should continue increasing and following the oil price, which seems to want to test the June highs close to $52/barrel. Even though oil’s correction lower was rapid, so was the reversal higher, suggesting that there is strong positive momentum, which should help propel the price to July highs and beyond.

Personally I am looking forward to barrel prices close to $80/b, but that will probably take over a year to reach and the 2015 high around $62/b could turn out to be a tough resistance to break on the first attempt.

Investors’ risk appetite, as measured by the Vanguard World stock index, has been moving together with the oil price since the beginning of 2015.

There have been notable divergences in the past – in the summer of 2015 oil prices fell first, followed later by stocks. Then toward the end of 2015 oil prices again fell first and stocks followed.

Now stock prices have rallied higher and despite the oil price falling, stocks didn’t follow.

If that divergence will again close, either stock prices will fall or oil will rally. My feeling is that oil is the one that will rally. This could also be an interesting spread trade – long oil, short stocks.

Oil versus stocks - monthly chart

crude and stocks
 Chart source: SaxoTrader - create your own charts with SaxoTrader. Click here to learn more 

-- Edited by Adam Courtenay

Juhani Huopainen is a blogger and a macro analyst at More Liver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.


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