The data on US crude oil inventories has brought noticeable relief to the market, once again hinting on lack of shale oil output rebound, despite warming weather and strengthening demand. Inventories dropped by ~5.9 million barrels last week, more than double than the forecast. Gasoline inventories declined more than expected as well, indicating that consumer demand remains strong.
The report apparently came as a surprise to the market. Oil prices jumped upwards on the release, breaking through the trading range that formed after the last oil mini-collapse:
Production in the US is indeed recovering slowly despite increasing rig count. It means that on the supply side, the picture is still quite favorable for price growth:
The IEA's monthly report released on Wednesday also pushed prices higher. The agency has significantly raised its forecast for oil consumption in the second quarter of 2021, which makes it possible to expect the market to better cope with the forthcoming increase in OPEC production.
The geopolitical factor also accompanies the rise in oil prices. The chances of a quick conclusion of a nuclear deal between Iran and the United States have decreased due to the escalation of the conflict between Israel and Iran, which means that a quick return of Iranian barrels to the market (with a potential of 2 million bbl/d) is not to be expected.
Another piece of data on inflation in the US again exceeded expectations, but assets’ market lacked response. Import and export prices for March were significantly higher than the forecast, indicating that supply is not keeping up with demand. This is a perfectly reasonable assumption, given the series of fiscal stimulus in the US that has sparked a surge in consumer demand. By looking at prices in terms of their signaling function to producers, firms will start adjusting their output in response to price increases, so we first need to see inflation.
It is becoming increasingly difficult for the Fed to maintain the status quo against the backdrop of hints of inflation coming from “all the cracks in the economy”. Therefore, commenting on what is happening, officials are increasingly saying that inflation is not a problem and monetary stimulus are not endless. Yesterday the head of the Central Bank Powell said that the curtailment of QE will begin "much earlier" than the rate hike, and the Fed is going to keep rates at the current level at least until the end of 2022 (previously the deadline was until the end of 2023).
The early withdrawal of monetary incentives is one of the main threats to the growth of risk assets. An important component of their fundamental assessment is the cost of credit, which justifies their high sensitivity to any hints about an early tightening of the Central Bank's policy.
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