- U.S. housing starts expected to remain strong
- Kuwait oil strike temporarily saves the oil market
- EIA report expected to show a +$3.0 million bbl increase in U.S. oil inventories
U.S. housing starts expected to remain strong — The market is expecting today’s March U.S. housing starts report to show a small decline of -1.0% to 1.166 million, giving back part of Feb’s +5.2% increase to 1.178 million. Meanwhile, Mar building permits are expected to show an increase of +2.0% to 1.200 million, reversing most of Feb’s decline of -2.2% to 1.177 million.
Housing starts posted an 8-1/4 year high of 1.211 million units in June 2015 and have since been moving sideways below that level. In February, the series level of 1.178 million units was only -2.7% below that 8-1/4 year high of 1.211 million units, indicating that U.S. homes are still being built at a strong pace. Moreover, single family home starts have been even stronger, posting a new 8-1/3 year high of 822,000 in February, as multi-family housing starts have recently seen some weakness.
Housing starts have been boosted by decent home sale levels, rising home prices, and mildly tight home supplies. Specifically, new home sales in February rose by +2.0% to 512,000 units, which was only -6.1% below the 7-3/4 year high of 545,000 units posted in Feb 2015. The supply of new homes on the market was at 5.6 months in Feb, which was tighter than the long-term average of 6.1 months. The median price of a new home was at $301,400 in February, which was down by only -7.7% form the record high of $317,000 posted in Nov 2015.
Kuwait oil strike temporarily saves the oil market — Crude oil prices initially fell by up to -7% on Sunday evening after news of the failed Doha talks to freeze production. However, Jan WTI crude oil climbed back on Monday and closed just -$0.44 lower (-1.09%) at $39.92 because of a strike in Kuwait. The Kuwait strike cut the country’s oil production by about -60% (1.7 million bpd). It remains unclear how long the Kuwait strike might last, although the amount of oil and money involved suggests that Kuwait’s oil company will be motivated to settle as quickly as it can.
Once the Kuwaiti oil strike is settled, then the oil market will get back to contemplating the implications of the failed Doha talks. The bottom line of the failed talks is that Saudi Arabia plans to continue its hardline plan of protecting its market share and not giving Iran a free ride on boosting its oil production to pre-sanction levels. Even more bearish for oil prices, Saudi Arabia Deputy Crown Prince Mohammed bin Salman recently implied that Saudi Arabia could respond to rising production from any country (read, Iran) with its own production hike, saying Saudi Arabia has the capacity to raise production by more than 1 million bpd immediately and by double that amount in 6-9 months. If Saudi Arabia were to make good on its thinly-veiled threat to substantially raise production from current levels, then oil prices could easily fall to challenge the early-year lows.
Iran has already boosted its production by +400,000 bpd (+14%) from 2.800 million bpd in Q4-2015 to 3.200 million bpd in March thanks to the lifting of sanctions in January. Over the next year or so, Iran is aiming for a further +800,000 bpd (+25%) boost in production to its pre-sanction levels of as much as 4.0 million bpd.
Many media stories continue to focus on the tightening fundamentals of the oil market whereby falling production, due to low prices, is bringing oil supply closer into balance with demand. However, the world is still seeing a substantial excess of oil production, and oil is therefore still being added to inventories.
The failure of the Doha talks prompted talk that it will now take well into 2017 before supply and demand are balanced and the buildup in oil inventories finally stops. Yet we are focused more on the near-term downside risks for oil prices as Iran ramps up its production as quickly as possible through the end of this year and as Saudi Arabia blocks any cooperative effort among oil producers to freeze or cut production.
EIA report expected to show a +$3.0 million bbl increase in U.S. oil inventories — The market consensus for Wednesday’s weekly EIA report is for a +3.0 million bbl rise in U.S. crude oil inventories, a -10,000 bbl decline in Cushing oil inventories, a -2.0 million bbl decline in gasoline inventories, an unchanged level of distillate inventories, and an unchanged refinery utilization rate of 89.2%.
U.S. crude oil inventories remain in a massive glut at +34.7% above the 5-year seasonal average and at a record high of 536.531 million bbls. Product inventories are also plentiful with gasoline inventories at +10.3% above average and distillate inventories at +28.0% above average.
Meanwhile, U.S. oil production since mid-January has been falling due to the renewed plunge in oil prices in Jan-Feb, which caused more oil companies to give up hope and close down more oil rigs. Yet production on a year-to-date basis has so far fallen by only -2.4% even though another 187 rigs (-35%) have been shut down so far this year. The grand total decline in oil production so far is only -6.6% to 8.977 million bpd from the 43-year high of 9.610 million bpd posted in June 2015.