One of the most alarming datapoints for me this week relates to distillate oil (diesel and heating oil). Distillate demand slumped by an unprecedented 14.9% in Q2 and the July figures indicate a 27% drop although this is only one week worth of data. To add fuel to the fire, the DOE inventory data showed yesterday that distillate stocks reached their highest level in 25 years after a rise of 3.7 million barrels compared to consensus of an increase of 2 million barrels.
Why am I suddenly growing paranoid over distillate? You see, our oil analysts are telling me that distillate is a reliable coincident indicator of industrial production since it reflects activity in trucks, rail and agriculture (they even have a spectacular chart showing this relationship). Unfortunately, this datapoint seems to contradict our house view that industrial production is going to improve sharply.
Of course, this could well bounce in the coming weeks so it's too early to give up on the idea of a V-shaped recovery, but it seems equally foolish to put too much faith into this "all is well" scenario too.
My recent recommendation to short Japex (1662) has come out of the gate strongly and I think there is more to go in this trade. The other stocks that are shaping up to be excellent shorts are Isuzu (7202) and Hino Motors (7205).
Trucks are the biggest consumers of distillates, we recently learned that June medium truck sales were the worst since 1991, and the charts are getting as ugly as it gets. In any case, we need to keep an eagle's eye on this distillate demand datapoint in the coming weeks.
No comments:
Post a Comment