In spite of the agreements at the EU Summit on Friday the markets are still somewhat skeptical with Europe still in the forefront and still the main risk asset market driver heading into the new week of trading. The market continues to be pushed lower each time there is a comment that the ECB is not going to step up bond purchases (about the 10 time this comment has come out over the last week in various forms). The latest comment on bond purchases came from the Bundesbank overnight. It shows how the markets are still being impacted by rumors and 30 second news snippets...even those have been recycled many times. This is the environment the markets are likely to remain in for the foreseeable future or until Europe moves into the background.
Adding to the selling pressure overnight was a week data point out of China. Export growth came in at 13.8% in November or the weakest pace since 2009. China's biggest customers...Europe and the US are still in a very slow growth pattern and as such exports to these regions have declined strongly. For example exports to the EU rose just 5% from a year earlier or only about 25% of the rate of growth from back in the middle of the summer. The slow growth pattern in the developed world coupled with the tight monetary policy that has been in place in China for well over a year have both contributed to a slowing of the world's economic and oil demand growth engine. So bad news that the export data has slowed but possibly good news as this is yet another data point that is likely to move the Chinese government to switch to a more aggressive monetary easing policy. We have already seen a step in that direction a few weeks ago when the Chinese government lowered bank capital reserve requirements by 50 basis points. The China story and the potential for easing and possibly stimulus will be a story that moves more into the forefront in the coming weeks.
For the moment the combination of the European hangover and the slowing of export data out of China is enough to send most risk asset markets lower including oil prices this morning. Oil futures have declined about 0.9% so far overnight as OPEC readies for their Dec 14th meeting in Vienna. The continuation of the difference of opinion that started at the last meeting between the hawks and the doves is likely to continue in this meeting. Some of the hawks...like Iran are calling for a reduction in production while Saudi Arabia has been relatively quiet on this matter and at least based on the loading plans for Asia and Europe next month's volumes look to remain steady suggesting that the Saudi's are not planning on any immediate production cuts. With sanctions on purchases of Iranian crude oil for Europe a possibility I do not think the Saudi's are going to agree to any major cut in production at this meeting. I think the most that could happen is OPEC legitimizes its current production levels and adjust the official quota to match what they are already producing. The OPEC meeting will become a potential price driver over the next several days.
On the economic front the calendar is busier than last week and includes the final US Federal Reserve FOMC meeting of the year with the results to be announced on Tuesday afternoon. The market is expecting a status quo outcome and thus no change in the current strategy. In addition we will get retail sales data on Tuesday followed by import and export data on Wednesday. On Thursday the weekly initial jobless claims data will be released along with the first pass at inflation data... the PPI. On Friday production and capacity data as well as consumer inflation data (CPI) will be released in the US. Whether or not any of the macroeconomic data will carry enough market interest to offset what is likely to be another week of 30 second news snippets coming out of Europe is still an unknown.
So far this week is starting out on a negative note and not continuing where the markets left off last week. There is a lot of ground to recover as last week ended on a mixed note as shown in the EMI Weekly Price Board table below. As the situation in Europe unfolded by the time the end of the week arrived most all risk asset markets were starting to recover. Last week was all about Europe as discussed above as another new plan by Merkel and Sarkozy was approved at the EU Summit while the ECB lowered interest rates. The action and volatility last week was in all of the oil and commodity markets as well as the global equity markets. Last week was all about market players acting around the cloud of uncertainty that began to recede a bit in all risk asset markets. Equity bourses were mixed as uncertainty started to decrease by the end of the week. Precious metals decreased modestly even as the US dollar fell a tad on the week.
Over the last week the oil complex was lower across the board with HO the biggest loser in the complex. The Jan WTI contract decreased about 1.54% or $1.56/bbl. The Jan Brent contract ended the week with a loss of 1.20% or $1.32/bbl. The Jan Brent/WTI spread widened marginally by the end of the week.
On the distillate fuel front the Nymex HO contract decreased as distillate fuel inventories surged higher and more than the expectation while US distillate fuel exports seemed to have decreased. The spot Nymex HO contract decreased by 2.59% or $0.0775/gal. Gasoline prices decreased modestly on the week as gasoline stocks increased only marginally and within the expectations. The spot Nymex gasoline price decreased by 1.08% or $0.0285/gal this past week.
On the week Nat Gas futures decreased by 7.45% or $0.267/mmbtu. Nat Gas did what it seems to mostly do of late...decline in value. The combination of market participants digesting Thursday's inventory report which resulted in the surplus versus both last year and the five year average for the same week widening while the short term weather forecast is remaining bearish was enough to send prices in the futures markets down by over 3% on Friday. Overnight the spot Nymex Nat Gas futures price blew right through the 2011 year to date low and is currently trading at levels not seen since October of 2010. The downtrend in NG prices which began in June has remained in place in spite of the fact that we are now in the heart of the winter heating season.
In the meantime all one needs to watch is the daily short term weather forecasts which are suggesting that winter is not likely to arrive across a major portion of the US until the end of this month or possibly not until January at the earliest. The unseasonable weather is having a positive impact on the consumer in that their heating fuel bill should be lower than normal but certainly it is having a negative impact on the producers and utility gas suppliers. The warmer than normal weather is also resulting in the current surplus in inventory continuing to grow. The very early estimates I am seeing for this week's inventory report are around a net withdrawal of 85 to 95 BCF.
Sounds like a decent withdrawal until one compares it to last year which had net withdrawal of 154 BCF and the five year average withdrawal for the same week was 142 BCF. If the actual data is in the range of early estimates the current surplus is going to widen by about 60 BCF versus last year and about 50 BCF versus the five year average. With the surplus continuing to grow Nat Gas prices are going to have a lot of difficulty in moving off of their current low levels. The growing surplus is also reflected in the winter intermonth or calendar spreads that should be in a backwardation this time of the year rather they are in a contango that is continuing to widen ...another bearish indicator.
On the financial front equity markets around the world ended the week mixed. Fear of contagion coming from the southern EU member countries... although still a huge concern in the financial markets... eased a bit as the week progressed. Global equity values decreased as shown in the EMI Global Equity Index table below.
The EMI Index lost just 0.2% on the week keeping the Index further away from the bear market threshold level of 20%. The EMI Index widened its year to date loss to 13.8% with the US Dow back in positive territory for 2011. The US Dow is still in the top spot of all of the ten bourses in the Index with eight of the remaining nine bourses still showing double digit losses for the year. None of the individual bourses in the Index are over the bear market threshold of 20%. Last week the global equity markets were neutral for oil prices as well as the broader commodity complex.
The US Dollar Index depreciated in value on the week as confidence in the euro firmed up once again. By the end of the week cash was moving out of the dollar and slowly back into risk asset markets and out of the safe haven of the US dollar. The currency markets are still in the midst of a major realignment as I have been warning for months. Cash flowed out of gold (and the rest of the precious metals complex) which decreased by 1.96% on the week.
WTI is still trading above the key technical support level of the mid- $94's/bbl and along with the changing fundamentals and geopolitics I am still keeping my view and bias at cautiously bullish. In addition the cloud of uncertainty got a tad smaller last week in Europe after the Summit and the ECB meeting but we will have to continue to watch Europe closely as the sentiment could change on one or more negative news snippets at any time as the details of the new EU deal are worked out over the next few months. WTI & Brent are still in sync with the direction of the US dollar and euro but are also being driven by the ongoing geopolitical situations in the middle east.
I am maintaining my view and bias at cautiously bearish. The surplus that is building in inventory versus both last year and the five year average is going to get harder and harder to work off until it gets cold over a major portion of the US and as such for the medium term I am still very skeptical as to whether NG will be able to muster any kind of strong upside rally absent some very cold weather for an extended period of time.
Currently as a new day of trading gets underway in the US markets are lower.
Dominick A. Chirichella
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