Crude oil price recovers in European session as oil spill in the Gulf of Mexico returned to the spotlight. Currently trading at 86.3, the front-month WTI contract slid to 85.83 earlier today as Chinese accelerated tightening measures and loans to Greece awaits EU's meeting on May 7.
Concerns are growing as companies are struggling to stop the leaks, which are 5000 feet under water and gushing at an estimated rate of 5000 bbl/day. The oil spill caused by the explosion and sinking of the collapsed Deepwater Horizon drilling rig on April 20 threatens to disrupt shipping in the US Gulf of Mexico that imports of crude and oil products will be affected. This may translate into decline in oil inventory. In the long-term, the incident will trigger the government to import stricter legislations when dealing with drilling operations. The Obama administration has in fact suspended the issuance of new drilling leases after an investigation of the incident.
Other news lifting oil prices are strong economic data in the Eurozone. Manufacturing PMI in the 16-nation region was revised up to 57.6 in April. The market had anticipated it to stay at 57.5 a preliminary estimated. In Germany, the reading was also revised up to 61.5 from 61.3. In NY session, the US ISM manufacturing probably rose to 59.8 in April from 59.6 in the previous month, signaling further expansion in the manufacturing sector.
In China, PMI rose +0.6 points to 55.7 in April with the biggest increase coming from input price index. This signaled further rise in PPI which will be translated to consumer prices (CPI) later. In response to escalated inflationary pressure, the People's Bank of China announced to lift the Requirement Reserve Ratio (RRR) by +50 bps, effective May 10. The increase will bring the RRR for large commercial banks to 17%, just 50 bps below the peak of 17.5% in June-August 2008. Rural credit cooperatives and village/township banks are, however, excluded from this hike.
This is the third time since the beginning of the year that the central bank of China announced to hike the RRR as a means to control loans and hence inflation. While some analysts had anticipated the move will drain RMB300B of liquidity from the market, the short-term impact of commodity prices seems to be mild, compared with previous RRR hikes. One of the reasons is that the increase is expected by the market. Another reason is that the increase in RRR may delay the central bank's rate hike as well as appreciation in RMB, both are negative for growth, at least in the near-term.
Gold extends rally to 1184, a new high in 2010, as investors continue to find its safe haven status appealing. Although the rescue package has concluded, concerns remain there. The foremost uncertainty is whether the deal passes parliamentary approval by the EU. Well, we actually think this barrier is little as such funding is crucial for Greece. However, we remain concerned about Greece's ability to implement the austerity measures to cut deficits as well as the next step for European economies to resolve the deficit problems.