Financial markets strengthened further amid expectations that EU finance ministers will deliver plans to resolve the sovereign debt crisis. Sentiment was lifted after European Commissioner Barosso's comment that 'reactive and piecemeal responses to different aspects of the crisis are no longer sufficient', sparking hopes that the new measures will be effective. Oil prices fluctuated with WTI crude posting modest loss while Brent crude gaining for a 6th consecutive day. Major oil agencies released the latest demand forecasts. The IEA and the OPEC lowered their estimates while the EIA revised them higher.
Despite a more moderate growth outlook, the EIA still believed that markets will have to rely on inventories to meet some of the demand in 2011 and 2012. Growth in non-OECD countries remains robust. As growth in demand will likely outpace non-OEPC supply growth, the OPEC may need to pump more oil to the market. The Department saw balanced risks on oil prices. While the upward pressure is due to 'supply uncertainty' in oil producing regions, the downsides lowering expectations of economic growth and the ramp-up of output in Libya may send prices lower.
Both the IEA and the OPEC cut their demand growth forecasts. The IEA trimmed its oil demand outlook for 2012 for another month and stated that the risks lie to the downside. According to the agency, 'economic prospects remain fragile, particularly with the Eurozone's ongoing sovereign debt crisis...Global oil demand has grown at a moderate, but stable pace in recent months. The picture could deteriorate, however, with a downward lurch in economic prospects'. While not the base case, the IEA warned that a double-dip recession would bring a much weaker demand growth. The OPEC also raised its concerns over economic uncertainty and lowered its oil demand estimates. As stated in the monthly report, 'uncertainty in the world economy has dimmed the picture for 2011, particularly in the OECD region'. Meanwhile, the cartel cited that China's plan to reduce fuel use and India's policy to raise retail prices are contributing to the downward revision in oil demand growth in the coming year.
The industry-sponsored API reported a -3.8 mmb decline in crude oil inventory in the week ended October 7. Gasoline and distillate inventory also fell, by -1.2 mmb and -3.1 mmb respectively. The market expected the DOE/EIA today will show a -0.3 mmb dip in crude inventory. Supplies of gasoline probably increased -0.1 mmb while stockpiles of distillates slipped -0.6 mmb during the week.
The FOMC minutes for the September unveiled that policymakers favored improving communication to the market about the goals for inflation and employment. As mentioned in the minutes, 'most participants indicated that they favored taking steps to increase further transparency of monetary policy, including providing more information about the Committee's longer-run policy objectives and about the factors that influence the Committee's policy decisions'. Most of them 'saw advantages in being more transparent about the conditionality in the Committee's forward guidance by providing more information about the economic conditions to which the guidance refers'. However, there were debates on whether the guidance would 'be mistaken for a statement of its longer-run objectives'. Some believed this risk of misinterpretation could be managed through careful communications, though.
While the operation twist was announced after the meeting, 3 options, a reinvestment maturity extension program, a portfolio maturity extension program, and a large-scale asset purchase program, were discussed for managing the size and composition of the System Open Market Account. The second, i.e. operation twist, was chosen as it would not expand the Fed's balance sheet or the level of reserve balances. Members also noted that that 'the scale of such a program was necessarily limited by the size of the Fed's holdings of shorter-term securities so that it could not be repeated to provide further stimulus'. The minutes also unveiled that 2 members favored stronger action while 3 members dissented to take additional accommodation'.