By textbook definition, the crude oil market is back in a bull market, yet with weak economic data coming out of China and Europe, it is it time to throw out the book. Oil posted its biggest 3-day rally since 1990 and put futures back in bull market territory based on a report that U.S. oil production may be falling faster than previously reported, and OPEC is willing to talk with non-Opec oil producers to try to establish a "fair price for oil." Yet, is it bad news in China and Europe or good news?
This may lead to more stimulus, but are things really as bad as they seem? Maybe not.
The Wall Street Journal is reporting that "China's government's official purchasing managers index (out Tuesday) fell to 49.7 in August--its lowest reading in three years. The private Caixin index showed an even worse picture at 47.3, a six-year low. But unlike the stock market, real activity isn't in free fall. Those measures may have been weighed by temporary factors, including the Tianjin factory explosion and a clampdown on industrial activity to keep the skies clean ahead of Beijing's big military parade this week.
Meanwhile, purchasing managers surveys of the services sector remain in positive territory, suggesting strains for now are somewhat confined to old-line industrial companies. And in the crucial property sector, data out Tuesday from the China Real Estate Index System shows home prices continue to rebound, moving into positive territory in year-over-year terms for the first time since September 2014. So, if the data is stronger than reported, then it is very possible that Chinese oil demand will stay strong.
This comes the day after The Energy Information Administration lowered the forecast for U.S. Production and OPEC is talking about discussing cutting production. OPEC "stands ready to talk to all other producers" to achieve "fair and reasonable prices." But this has to be a level playing field. OPEC will protect its own interests. This might have been inspired by Russia and Venezuela. Dow Jones reports that Russian President Vladimir Putin will discuss "possible mutual steps" to stabilize the global oil prices at a meeting with Venezuelan President Maduro in China on Thursday, a Kremlin aide said, as both countries grapple with lower prices for their main export.
The EIA also reported a bigger drop in U.S. oil output than many had thought. The Energy Information reported that U.S. crude oil production in June 2015 at 9.3 million barrels per day, a decrease of approximately 100,000 b/d from the revised May 2015 figure. Production estimates released in the PSM for January through May were revised downward by 40,000 b/d to 130,000 b/d. The largest revisions in volume include decreases of oil production in Texas (ranging from about 100,000 b/d to 150,000 b/d) and increases in the federal Gulf of Mexico (ranging from about 10,000 b/d to 50,000 b/d). U.S. crude oil production for the first six months of 2015 averaged 9.4 million b/d.