Wednesday, May 11, 2005

Trade Deficit Improving, Oil Inventories at 6-year Highs

- The Trade Balance for March rose to -$55.0B versus estimates of -$61.9B and -$60.6B in February.
- Summary of Weekly Petroleum Data for the Week Ending May 6, 2005.
- The EIA reported that crude inventories rose 2.67M barrels versus estimates of a 1.25M rise. Distillate fuel inventories rose 1.7M barrels versus estimates of a 275K gain. Gasoline inventories rose 187K barrels versus estimates of a 900K increase.

Bottom Line: The US trade deficit unexpectedly shrank in March to $55 billion, the best showing in 6 months. This should help boost GDP estimates. US exports are now at an all-time high. Imports from China fell. Imports of all goods and services fell 2.5% in March, the largest drop since December 2001. This is bullish for the US dollar. The Dollar Index(DXY) is breaking above its 200-day moving-average for the first time since last September. This afternoon’s Monthly Budget Statement should also help.

Crude inventories are now at the highest level since July 1999, when demand was rising dramatically during the height of the bubble. Last year, US 4Q growth accelerated substantially due to the end of the election and tax incentives. There are no such catalysts this year. The IEA today CUT its 2005 Chinese crude demand growth estimate to 7.4% from 16.0% last year. I expect further estimate cuts for China later in the year. This is significant. I continue to believe oil is being propped up by the “belief” that 4Q demand will soar. I find this highly unlikely. I believe demand will decelerate from last year's levels.

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