A refining capacity shortage is looming globally and could materialize as soon as next year, the chief executive of Phillips 66 told Bloomberg in an interview.

The potential shortage would be triggered by capacity shutdowns, Mark Lashier said, as some refiners succumb to low refining margins. The closures could take 700,000 bpd off the market, he added.

“The US has become very competitive in refining,” Lashier said. “We’re able to compete out in the world global markets.”

Lashier’s bullish predictions come soon after reports that U.S. refiners were planning production cutbacks due to low margins. Bloomberg reported in mid-August that Marathon Petroleum planned to reduce its capacity utilization rate to 90% at all its 13 refineries, which is down from 97% for the second quarter. PBF Energy was going to cut its processing rates to the lowest in three years.

Valero Energy would be reducing its operating rate from 3 million barrels daily to 2.86 million bpd. This is the lowest processing rate in two years. Phillips 66, for its part, was planning to cut processing rates to the low 90s in terms of capacity, which would be down from 98% in the second quarter—the highest in five years.

“Compressed refining margins are setting up the stage for another round of heavy refinery maintenance in the US during the fall season,” Vikas Dwivedi, global oil and gas strategist at Macquarie, told Bloomberg also last month. “That’s going to weigh on balances and may add to crude builds in the US for the rest of the year.”

Phillips 66’s Lashier acknowledged the U.S. fuels market has been well supplied this year amid flat to weak demand, but still expects a global shortage of refining capacity next year, which could broaden markets for U.S. refiners, which can remain profitable at margins that would force the closure of refining facilities elsewhere.

Source: OILPRICE

Timo Wollmershaeuser, head of economic research at Gemany’s highly influential IFO institute, said on Thursday that the German economy is seen stagnating this year, compared to a 0.4% growth previously projected.  

Additional takeaways

"The German economy is stuck and is bobbing around in the doldrums, while other countries are feeling the upswing.”

“It expects the economy to grow by 0.9% next year, lower than the 1.5% previously forecast.”

“In 2026, Gross Domestic Product is likely to increase by 1.5%, according to the economic institute.”

German inflation is seen falling to 2.2% this year, from 5.9% last year.

"The order situation is poor and the gains in purchasing power are not leading to increased consumption, but to higher savings because people are insecure.”

“Unemployment is likely to go up due to the economic weakness, rising to 6.0% in 2024 from 5.7% in 2023. It will then fall to 5.8% next year and reach 5.3% in 2026.”

Source: FXSTREET

ISM suggests manufacturing continues to contract

The US ISM manufacturing index has risen to 47.2 in August from 46.8. It is a touch weaker than the 47.5 figure predicted with the disappointment concentrated in the new orders and production components. New orders slipped to 44.6 from 47.4 while production deteriorated to 44.8 from 45.9. Remember that anything below 50 is a contraction and the further below 50 the steeper the contraction.

Additionally, there is a worrying narrowing of the pockets of strength. Just 22% of industry is experiencing rising orders and just 17% are seeing rising production. Historically, this weakness in output and orders points to a sharp slowing in GDP growth as the chart below shows.

ISM output balances and GDP growth

Source: Macrobond, ING

The reason for the increase in the headline index – which merely indicates a less steep pace of contraction for the sector – was that the backlog of orders rose a touch and employment improved from 43.3 from 46.0, but again, this is just saying that workforces are shrinking at a slower pace. Some in the market may be wary about the rise in prices paid to 54.0 from 52.9, but the trend is still cooling and it remains below its 6M average of 55.5. As such this report remains fully consistent with an ongoing series of meaningful interest rate cuts from the Federal Reserve.

Construction is cooling too

Separately, construction spending fell 0.3% rather than rise 0.1% month-on-month as predicted. There were some significant revisions, including a 0.3pp upgrade to June from -0.3% MoM to 0.0%, but the trend is certainly softening. The outlook for residential construction is not great given the weakness seen in home builders sentiment as a lack of affordability continues to constrain demand. Meanwhile, there appears to be a notable cooling in non-residential construction with two consecutive negative monthly prints. Importantly, the report hints that the support from the inflation Reduction Act is waning quite noticeably with the huge surge in construction activity tied to semi-conductor manufacturing seemingly starting to subside. So with manufacturing languishing and construction cooling, there is going to be an increasingly reliance on the service sector to provide economic growth.

Construction spending levels Jan 2002 = 100

Source: Macrobond, ING

US equities remained under pressure yesterday after the JOLTS report revealed that the US job openings unexpectedly fell further in July to the lowest level since 2021. The factory orders on the other hand jumped 5%, more than expected, during the same month – a welcome addition to the jolts figure that could partly tame the rising recession worries for the US.

But the latter couldn’t prevent the US 2-year yield from falling by a big chunk to 3.75%, a level that was last seen during the summer meltdown, the 10-year yield fell to the same level as well, closing its more than two year persistent gap with the 2-year yield, the US dollar fell sharply and… the USDJPY dropped to the lowest levels since the beginning of August, as well, as the Bank of Japan (BoJ) Governor Ueda added more fuel to fire saying that the bank will continue to raise the borrowing costs if needed. And today’s stronger-than-expected wage income data supported the hawkish view.

So you understood, we are living a situation of deja vu: rising dovish Federal Reserve (Fed) expectations combined with rising hawkish BoJ bets result in a movement of capital out of the risk of equities, and a flight into the safety of the Japanese yen. But this time around, the price action is not triggered by the actual data, but by the fear of seeing a second month of disappointment in the US jobs data – that will undoubtedly boost the expectation of more than one jumbo rate cuts from the Fed between September and the year end (as the market is already pricing in a full percentage point cut before the end of the year and we haven’t seen the data yet). The latter would further weigh on US yields, potentially on the US dollar – if the greenback fails to attract safe haven flows, and probably on equities as well, regardless of their exposure to technology.

For now though, the equity traders remain calm. The S&P500 retreated just 0.16% yesterday and is sitting on its 50-DMA, Nasdaq 100 lost a bit more than that, 0.20%, and slipped below its 100-DMA, Nvidia fell another 1.66% even after saying that they have not received a subpoena from the DoJ as reported by Bloomberg the day before. But the Dow Jones index managed to eke out a small gain as the falling yields and the rebound in factory orders kept some big names in the index afloat.

A consensus of analyst estimates on Bloomberg predict that the US economy may have added 144K private jobs last month, a certain rebound from the 122K printed a month earlier. A data in line with expectations, or ideally stronger-than-expected, could pour some cold water on the recession worries and keep indices stable into Friday’s official jobs figures. A softer-than-expected figure on the other hand will likely fuel the recession worries and could further weigh on US treasury yields, the dollar and stock indices.

Also on the watchlist, ISM services, weekly crude inventories and Broadcom earnings. I have said in yesterday’s episode that Broadcom is also expected to reveal strong Q2 results after the bell. Their results are expected to be boosted by growing AI demand, a rebound in networking equipment services, and VMware’s transition from perpetual sales to subscription model – which is also thought to have contributed to the revenue increase. All this is good, but even good results from Broadcom are not a guarantee of a rebound in the company’s stock price, as the investor focus has moved from corporate earnings – which remain robust for the tech companies by the way – to the economic data, where the macroeconomic setup is not ideal for the technology companies. Voila.

OPEC blinks

Oil bears didn’t wait Friday’s data to send the barrel of US crude below the $70pb level. The rising fear of US slowdown, on top of the Chinese worries, accelerated the early week selloff. As a response to the recent meltdown in oil prices, and the potential of a deeper dive in case of worsening data, OPEC+ delegates said yesterday that they are considering a possible delay to their plan to increase supply by 180’000 from October. Surprise, surprise.

But even if OPEC+ plays it safe, their decision to extend the production cuts to the year end may not suffice to cheer up the oil bulls – increasingly worried about waning demand prospects on deteriorating global macro setup. Pricewise, this means that better-than-expected jobs figures from the US could bring dipbuyers in, carry and keep the barrel of US crude above the $70pb but another disappointment will likely accelerate the selloff and build a resistance near this level, no matter what OPEC+ decides to do.

In the FX

The US dollar’s sharp fall yesterday gave strength to currencies around the world. The USDCAD fell despite a 25bp cut from the Bank of Canada (BoC), the EURUSD traded a few pips below the 1.11 level despite a set of softer-than-expected PMI figures from the Eurozone. Cable rebounded from the 1.31 support, but there, the stronger-than-expected PMI figures reinforced the improved growth prospects for the UK economy.

The outlook for the EURGBP remains bearish, not only because the UK economy has been performing better than its European peers, but also because the dark clouds over the UK are finally dissipating. Earlier this week, a bond sale in the UK attracted record demand thanks to higher gilt yields – a sign of restoring confidence in UK politics after the Conservatives were ousted from the leadership of the country. And on top of it all, the Bank of England (BoE) adopts a more moderate dovish stance than its western peers – which is also a reason why investors see a brighter future for sterling against both the US dollar and the euro.

News came that the Governor of the Bank of Japan, Kazuo Ueda, had reiterated that further rate hikes are likely to follow as long as the BoJ's outlook is realized. He pointed out that even after the July rate hike, the real interest rate will remain significantly negative, which will continue to support the real economy, Commerzbank’s FX strategist Chris Turner notes.

Yen is likely to come under depreciation pressure again

“The real interest rate is clearly negative. Comparing this with the rest of the G10, it is clear that the Japanese real interest rate is by far the most negative, ergo the most expansionary. All the other central banks have responded to the inflationary shock of recent years by raising interest rates sharply. Inflation is now falling around the world, so their real interest rates are becoming positive. Only the BoJ is known to have missed the cycle.”

“Japanese inflation is mainly externally driven, i.e. a self-sustaining inflation process has not yet started. From this point of view, there is no need to tighten monetary policy. Nor is growth strong enough to warrant tightening the reins. Japan's GDP has only recently returned to pre-pandemic levels. That makes it the worst performer in the G7. The current real interest rate therefore does not appear to be expansive in a way that sufficiently supports the real economy.”

“In the short term, it does not matter for the yen whether the rate hikes are fundamentally justified or not. Either way, the yen benefits from the interest rate differential, as we saw on Tuesday after the announcement. In the medium term, however, if the BoJ unnecessarily ensures that inflationary pressures fizzle out and at the same time puts pressure on the real economy with a more restrictive monetary policy, the yen is likely to come under depreciation pressure again in the medium term.”

Source: FXSTREET

Source: Poundsterlinglive