FBMKLCI vs Brent Crude (Updated)

News Update: 

Oil prices fell to almost four-month lows on Wednesday after data showed U.S. crude inventories rising faster than expected, piling pressure on OPEC to extend output cuts beyond June.

The American Petroleum Institute said late Tuesday that U.S. inventories climbed by 4.5 million barrels to 533.6 million last week, outpacing analyst forecasts of 2.8 million.

Investors now want to see whether Wednesday’s figures from the U.S. Energy Information Administration confirm the rise. EIA will release its report at 10:30 a.m. EDT (9:30 a.m. ET).

“With U.S. crude stocks continuing to mount into record territory both in total and at Cushing following almost two months of OPEC production restraint, we feel that the odds of a gradual unraveling in the OPEC agreement have been increased significantly,” Jim Ritterbusch, president of Chicago-based energy advisory firm Ritterbusch & Associates, said in a note.

Global benchmark Brent futures for May delivery were down 59 cents, or 1.1 per cent, at $50.37 a barrel by 9:48 a.m. ET. Earlier the contract fell as low as $50.05, its lowest since Nov. 30 when OPEC countries agreed to cut output.

On its first day as the front-month, U.S. West Texas Intermediate (WTI) crude futures for May were down 53 cents, or 1.1 per cent, at $47.71 per barrel.

“A look below $50 (for Brent) is quite possible today if (EIA) data show a similar pattern, but it’s impossible to say how far below $50,” Commerzbank analyst Carsten Fritsch said.

A deal between the Organization of the Petroleum Exporting Countries and some non-OPEC producers to reduce output by 1.8 million barrels per day (bpd) in the first half of 2017 has had little impact on bulging global stockpiles of oil.

OPEC, which sources say is increasingly leaning toward extending cuts, has broadly delivered on pledged reductions so far, but non-OPEC states have yet to cut fully in line with commitments.

“OPEC has used up most of its arsenal of verbal weapons to support the market. One hundred per cent compliance by all is the only tool they have left and on that account they are struggling,” said Ole Hansen, head of commodity strategy at Saxo Bank.

U.S. shale oil producers have been adding rigs, pushing up the country’s weekly oil production to about 9.1 million bpd for the week ended March 10, up from an average of 8.9 million bpd for calendar 2016, according to U.S. energy data.

“OPEC’s market intervention has not yet resulted in significant visible inventory drawdowns, and the financial markets have lost patience,” U.S. bank Jefferies said in a note.

But the bank said the market was undersupplied and, if OPEC extended cuts into the second half, inventories would draw down and prices recover above $60 in the fourth quarter.

However, it said U.S. crude production was expected to grow by 360,000 bpd in 2017 and 1 million bpd in 2018, and a price recovery could spur more U.S. shale activity.

Source – read more

Clearly, we are not seeing an optimistic view for the brent crude oil. Further, downside risk for brent still prevails. How does this impact on Malaysia’s FBMKLCI stock index?

Generally, there is a positive correlation between FBMKLCI and Brent. Nevertheless, lately, we are seeing a “divergence” whereby FBMKLCI has been rising whilst brent has been declining.

B v K.png

Given the bearish prevailing sentiment for brent, is Malaysia’s FBMKLCI’s overstretched?

0200I.MY.jpeg

The following table shows the updated regression analysis between FBMKLCI and brent (since June 2014), whereby there is significant statistical relationship between FBMKLCI / brent:

Relationship_March 2017.png

Currently, the actual FBMKLCI exceeds its forecast value of 1,697 points but nevertheless it is within the 95%-confidence interval of between 1,601 – 1,792.

FKLCIvsBrent_Graph.png

Based on the regression relationships, the following table shows the possible forecast range of FBMKLCI based on the movements in brent crude (USD) (USD25 – USD62.50):

Forecast Range.png

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

Author: Ken Utau

Data Scientist, Markets Analyst and Food Lover

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