Oil inventories, the key to today's session

The Day So Far

Surprise drawdown in the API crude inventories last night briefly gave equities a bit of a bounce following yesterday’s heavy selloff, before sellers emerged once again this morning with European equities leading the way as Stoxx and the Dax broke yesterday’s lows. WTI crude had a very hectic session yesterday, dropping all the way from $38 handle to S1 at $36.60, before roaring all the way back to pivot later on in the session as US equities bounced. This morning crude is chopping around the $38 handle once more, above the previous yearly lows at as traders weigh up the prospect of a first drawdown in DOE US crude inventories in 10 weeks, last night’s API showing a drawdown of 1.9 million barrels. This provides some short-term respite to a massively oversupplied market but we are sticking with our short bias in crude for now until fundamentals improve further.

In China, Producer prices deflated for a 45th consecutive month in November, this time at a rate of 5.9% as Chinese demand continues to underwhelm, whilst in M&A news US chemical giants Dow Chemical and DuPont are in talks on a deal to combine the two companies to create the 2 chemicals company in the world. Global M&A spend recently exceeded the 2007 highs as companies have rushed to take advantage of the low rate environment to splash out on other competitors and acquire top-line growth in a world where organic growth has proven hard to achieve.

The Afternoon View

Looking ahead to the afternoon session, the DOE inventory data the highlight at 15:30 BST particularly given the focus on crude at the moment. The DOE estimates are unchanged despite last night’s API release so a drawdown is likely. How the market reacts is unclear but could give way to a choppy session for crude as shorts pause for breath after a very strong sell-off in recent weeks. We are short the S&P once more, although it should be noted that the correlation with S&P and crude is positive and powerful at present, so equity shorts should be wary if crude rallies hard this afternoon. Short t notes once more, yesterday’s strategy working well and we look for another short from yesterday’s high, while we are short the euro from last Thursday’s ‘Draghi disappointment’ highs, not anticipating a convincing break of the 1.10 handle before the FOMC in a week’s time.

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