Morning Market Overview

Oil prices declined for the second week in a row after yet another tumultuous week in the financial markets. All asset markets have been trading erratically with an above average level of volatility emanating from a high degree of uncertainty.

The uncertainty is coming from talks of possible trade wars between the US and China as well as exposure to inflation risk. Market participants dislike uncertainty resulting in most participants moving their trade horizon to the very short term and trading with very tight trailing stops. We remain of the view that the market is overacting to the talk of trade wars as we believe the US and China are still simply in a negotiating stance and much of what is circulating around the media airwaves is a view and not a fact as negotiations are going on between both countries which remain behind closed doors.

As far as inflation risk is concerned we also believe that it is being overplayed as the data does not suggest that the US is exposed to any level of runaway inflation. For example, Friday’s Monthly US Labor Department employment date reported a much smaller (103,000) than forecast number of new jobs created with the unemployment rate remaining the same as the previous month.

On the fundamental front last week’s EIA inventory report was supportive as total combined stocks of crude oil and refined products declined once again and are now just 7.9 million bbls above the five-year average with crude oil below the 5-year average level. Despite US crude oil production remaining in an uptrend inventories are still in a destocking pattern in the US and globally. Until that pattern changes prices will have a backstop on the downside with the externals (direction of equities and the US dollar) playing a larger role in the oil price direction over the short term compared to the fundamentals.

A negative data point hit the media airwaves late Friday afternoon in the latest Baker Hughes data reporting the number of rigs deployed to the US oil sector increased on the week (by 11 rigs) after increasing during the previous week. The latest rig data still supports the overall uptrend in the US oil rig count remains. Total rigs deployed to the oil sector are higher by 136 or 20.2 percent year over year. US crude oil production continues in an uptrend setting new record highs on a weekly basis. Total US crude oil production is about 14.39 percent above where it was for the same week a year ago. This week’s production came in at 10.460 million bpd.