At the moment it looks like oil prices may be heading for a weekly gain after losing ground the previous week. The majority of the support this week came from a growing view that the main economic and oil demand growth engine of the world ...China... may be finally starting to turn the corner and grow at a faster pace than it has been during most of 2012. In the middle of the week and amidst mostly bearish fundamental data (especially this week's EIA oil inventory report) the IEA monthly report projected a bit of a growth spurt in Chinese oil demand for 2013. That was enough to offset the bearish weekly EIA inventory report and actually move prices into positive territory.
Overnight the latest flash PMI manufacturing data out of China is suggesting that the energy sensitive manufacturing sector is expanding at a faster pace than previous months. The HSBC & Markit Economics December preliminary reading was 50.9 (above the 50 threshold indicating expansion) and above the consensus estimates of 50.8 and higher than the November Index reading of 50.5. This is the first time in about a year that it has moved into the expansion mode.
The Index bolstered Chinese stocks to their largest daily gain in years narrowing the year to date loss for China's Shanghai A shares (see below for more details). Some of the early estimates for July to September GDP project that the economy may have grown at a rate of 8.4% up from 7.4% a year earlier. Since the worst of the financial crisis began back in 2008 China has been the main area of the world that has led the global economy into an expansion mode as well as been responsible for a major portion of the oil demand growth over the last four years.
In the Euro zone the flash PMI manufacturing Index was steady coming in at 46.3 for December versus 46.2 for November. Although it is still in the contraction mode at least the Index is starting to show the very early signs that it may be stabilizing. In addition the EU private sector contracted at a slower pace as Germany continues to recover. The PMI services sector Index hit a nine month high of 47.3 in December versus 46.5 for November. Again although still in the contraction mode it is also starting to turn the corner and show signs of stabilizing.
Europe is still in recession but the early signs are indicating that it may not be falling deeper into recession. The EU economy is not going to have much of an impact on global oil demand growth in 2013 but if the macroeconomic data continues to show improvement oil consumption may begin to stop the decline it has experienced over the last year or so.
In the US the main event is the ongoing budget talks to try to reach a deal before the so called fiscal cliff is triggered at the end of the year. The time is getting short. The President and the Speaker of the House met last evening in the White House as both side only slowly move toward a deal. They met for an hour with no public announcement after the meeting nor any 30 second news snippets from either side. I suspect the negotiations may come down to the very end with a possibility of a deal still being reached before the Christmas holiday break... although both sides told their staffs that they may be spending the holidays in Washington DC.
There will be a deal in my view and I still find it problematic that a deal has not been reached as of yet. The latest polls in the US strongly favor a deal involving tax increases and spending cuts. All of the signs suggest that this is going to be the form of the deal. I must say it is time for both side to end the stalemate and get a deal done so that this huge cloud of uncertainty is removed from the economy and thus the markets. Unfortunately the markets will most likely be laden with the games going on in Washington DC for another few weeks.
Global equity markets held steady over the last twenty four hours as gains in Asia offset the losses in the west during yesterday's trading session. The EMI Global Equity Index is still higher by 1.4% for the week with the year to date gain holding at 9.5%. The main storyline over the last twenty four hours is the over 4% gain in the Chinese bourse narrowing its year to date loss to just 2.3% and thus possibly setting up for this Index to move into positive territory for the year over the next two weeks. The EMI Index remains a positive price driver for the oil complex as well as the broader commodity markets.
From a technical perspective the spot Nymex WTI contract has been in a very narrow trading grange for the last 7 trading sessions. The trading range is about $2.50/bbl with $87.50/bbl at the upper end and $85/bbl at the lower end. A similar trading pattern also exists for the spot Brent contract. The oil complex has been in a battle between the bearish current fundamentals versus the slowly growing view that the forward fundamentals may be changing to a more supportive outlook. Or as many of the readers may recall over the last several years the market has switched several times to a perception view of the fundamentals and this seems to be what is currently happening at the moment.
I am not ready to anoint this market from the bullish side just yet but I am starting to change my bias to more of a neutral stance as the market has discounted the bearish current fundamentals several times this week suggesting that they are becoming less of a primary price driver than the perception view of what the fundamentals may be like during 2013.
I am adjusting my view and bias to neutral as the current fundamentals are still biased to the bearish but the forward view of 2013 fundamentals are starting to look more supportive. In addition the technicals are indicating that the selling momentum has eased as the market is now in a short term and narrow trading range.
There is still no shortage of oil anyplace in the world and a portion of the risk premium from the evolving geopolitics of the Middle East is continuing to slowly recede from the price of oil. But as discussed above the market seems to be paying less attention to the nearby fundamentals. In the short term the price of oil is still very susceptible to sudden price moves based the 30 second news snippets. This is still an event driven market for oil at the moment.
I am maintaining my Nat Gas price direction at cautiously bearish as the fundamentals and technicals are still suggesting that the market may be heading lower for the short term. I anticipate that the market is still positioned to test the lower end of the trading range... especially after this week's bearish inventory snapshot. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are in the early stages of the winter heating season and currently those forecasts are all still mostly bearish.
Markets are mostly higher into the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
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