Slip sliding away, slip sliding away. You know the nearer your destination the more you're slip sliding away and away we go. The economic recovery is slip sliding away as the market starts to brace for a potential double dip as US data goes sour. When the jobless claims came out much higher than expected and the Philly Fed flopped, instead of an economic recovery being nearer to its destination, the more it's slip sliding away.
Weekly claims rose by 12,000 to 500,000 and the Philly Fed went into the abyss falling to minus 7.7 for August contracting for the first time since July 2009. When the area of great concern in the market place (jobs) gets a dismal report and the bright spot in the economy (manufacturing) gets wacked into oblivion, fear came back into the market place.
Oh some call it the risk aversion trade but I say that's a polite way of saying people are scared. They are scared that this recovery is not happening anymore. They are worried that the US will slip and slide back into recession and they are worried that all the printed money in the world may not jump start this blighted economic recovery or create those all so essential jobs. When the risk aversion trade goes on, you know that the market is losing confidence and it is confidence that has to be restored if we have any hope for a lasting recovery.
And fears about the economy are not good for oil. As total petroleum supplies rise to all time highs it can only mean one thing and that is demand is falling far below supply. Now of course we have seen a reduction in floating storage and as the contango play becomes less attractive, we have seen more big traders trying to get rid of supply. Offshore storage according to some estimates has fallen by 40-45 million, an eight month low, while on shore storage has increase by 20-27 million barrels. The need for storing oil has diminished as has the incentive to store oil.
Some believe this reduction is a sign that demand is improving which it is to an extent but that improvement and the reduction in floating storage may be the markets way of actually reducing its forward demand outlook. In other words, the reduction of off shore inventories and the increase in on shore storage is actually bearish not bullish. You see when the market was in deep contango - when distant prices trade at a higher price than the spot month - it was saying one of two things about the need to store oil and why the market place was willing to pay for it.
One reason was that the market thought it was wise to store oil for a rainy day because if feared that because of the slowdown and lack of investment in production would cause tightness in the oil market when the economy rebounded. It was willing to pay for that cushion in supply at a later date when the economic rebound would surely arrive. The other reason was because the market feared commodity price and oil price inflation from global government's love of printing money.
The market was pricing in inflation expectations that would start to emerge as the biggest amount of stimulus hit the world since the big bang. Yet now the market and the tightening contango may be saying something quite different. It's saying that we now have slowing economy and a deflationary outlook. The market is slowing reducing the storage and the inflation premium they previously believed would be there. While some will try to paint the reduction in floating storage and surge in global inventories as a bullish event it may be actually a bearish event.
The market is saying that it is reducing its longer term demand expectations and its inflation expectations. It is telling us that the economic muck that we are in is going to go on for much longer time than we anticipate. The reduction in floating storage and the increase in onshore storage at record high means confidence and oil demand expectations are slip sliding away. Make sure you are getting my daily energy blast as well as a trail to my buy and sell points on all the major commodities! Just call me at 800-935-6487 or email me at firstname.lastname@example.org to open your account. And the best way to start your weekend is by watching the Fox Business Network and you can watch it all weekend long!
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