Oil Market and NFP Data Preview: What you Should Know Today

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The oil market found solid foothold from the output cuts by members of the OPEC+ pact, the nearest Brent contract has traded just above $ 30 per barrel while market contango has considerably reduced. This definitely a positive sign indicating rebalancing efforts work. The spread between July and August contracts is about 1 USD/bbl, while at the end of April the spread was 2.5 USD/bbl.

The decline in spread was also facilitated by a sharp drop in the rates of chartering tankers, which, in fact, reduces the cost of storing oil in floating tanks. Time spread compression was even stronger in WTI – since the end of April, the spread between June and July contracts has declined from 7 USD/bbl, to 1.3 USD/bbl. The flattening of futures curve indicates that the issue of a lack of oil storage is fading into the background.

Yesterday’s price increase was triggered by an unexpected decision of Saudi Arabia to raise the June official selling price for most grades of oil and for most regions. Below is the table of the changes:

The price for a barrel of Arab Light sold to Asian consumers rose by $ 1.40, while the benchmark discount remained quite high at $ 5.9. By raising prices, Saudi Arabia made it clear to the market that demand in Asia and Europe is recovering. This was the first increase in three months against the backdrop of a decrease in production by oil producers by almost 10 million barrels/day. Saudi Arabia also raised prices on Light grade by 6.55 USD/bbl for European consumers with discount relative to Brent remaining at 3.7 USD/bbl.

Export to China unexpectedly grew in April, customs data showed that imports of copper, the key metal used in production, grew by 14% YoY and 4.4% MoM. This indicates a recovery in demand from China’s manufacturing sector. Nevertheless, aluminum exports from China fell by 11.4% YoY, copper sales abroad fell by 12% YoY, indicating that demand abroad is still weak.

The number of new claims for unemployment benefits in the United States continued to grow, but at a slower pace, reaching 3169 thousand:

The US April NFP report is due today and the pandemic is expected to shave off 22 million jobs and send unemployment rate to 16%. As for unemployment, we are talking about the so-called U-3 indicator, which is calculated on the basis of the number of those who have lost their jobs and who are looking for them. The wider U-6, which also includes discouraged and part-time workers, is likely to be significantly higher and is of particular interest to markets.

The change in the number of jobs is calculated on the basis of the salary statements of enterprises, while the unemployment rate is calculated from household surveys. It is also important to take into account such a nuance as job creation during a pandemic, as judgments about the labor market based on claims for unemployment benefits do not take this into account.

Some companies took advantage of the option to receive preferential salary loans (federal program for the protection of jobs of $ 660 billion), i.e. could hire workers who received unemployment benefits. In general, there are many nuances and subtleties, including the cool reaction of the markets to all the recent weekly updates on unemployment claims (including yesterday), hence there are low expectations that the report will be able to move the market.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

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