The global markets are once again focused on growth slowing and even the potential for deflation in several key areas of the world. Today China's inflation rate eased to a 29 month low opening the door for the Chinese government to get even more aggressive in its monetary policy. In fact Premier Wen Jiabao said the government will intensify it response to the slowing of the Chinese economy. Around Asia China's CPI rose just 2.2% in June versus a year ago while Japan's May machinery orders declined the most since 2001. In addition Hong Kong and Vietnam both signaled growth may fall short of the official forecasts.
Inflation is not an issue in most of Asia while growth is continuing to slow...a path that could lead to deflation if the economies of this region do not pick up. It is also a formula that suggests the central banks in this region of the world will get even more aggressive and likely continue to lower short term interest rates, reduce bank reserve requirements and possibly even embark on some sort of stimulus program as they did during the height of the financial crisis. The Bank of Japan meets this week and says that it is fully committed to pursuing powerful monetary easing until inflation hits the 1% target set earlier in the year.
In the US Friday's payroll number underperformed for the third month in a row coming in at only 80,000 new net jobs created. The US economy is also in a growth slowing pattern with most signs suggesting that this pattern will continue. The main question circulating around the media airwaves is will the US Central Bank embark on another round of quantitative easing when they meet in August. Many are forecasting that the faltering employment situation in the US will push the US Fed into a QE3 program and likely have to keep short term interest rates at near zero into 2015.
In Europe the EU leadership is not only faced with the evolving sovereign debt situation but is also watching its economy fall back into a double dip recession. Today the EU Finance Ministers meet in Brussels to begin to discuss the details of the deal put forth by the Ministers meeting a week or so ago. The EU is now moving from the 30,000 foot deal level to one where the details have to be worked out and then evaluated by the market as to whether or not it will be the lasting solution that has alluded the EU for the last three years. So while the majority of the attention in Europe remains with solving the debt problems not enough attention seems to be focused on solving the lack of growth problem that is sending this regional economy deeper into recession.
The IMF is ready to cut its global economic growth forecasts in the next month. The world economic outlook is tilted to the downside according to the head of the IMF. With global demand slowing more Central Banks are focusing on monetary easing. In the last week China lowered interest rates for the second time in a month, the UK embarked on another round of quantitative easing, Denmark and the ECB lowered interest rates while the US data suggest more aggressive easing coming with Japan likely to also announce more easing at its meeting this week. It is hard to find any major economy that is growing on its own and not in need of some form of monetary easing. For the rest of the year easing and/or stimulus programs are going to be the main and only growth catalysts of the major economies of the world.
This all translates to a slowing of oil consumption growth for the next year or so. Europe and the US are already forecast to experience a decline in oil consumption in 2012 with the main oil demand growth engine of the world...China also expected to consume less oil than the early forecasts. At the moment the world is short on demand while supply is in the caution mode. The Norwegian strike is continuing while the Iranian embargo is evolving. Supply and demand are still biased to the supply side but the gap could be starting to narrow especially if the Norwegian strike continues for an extended period of time.
Over the last week the oil complex was mixed with most of the complex hovering around the unchanged level for the week with the exception of RBOB gasoline. The August WTI contract decreased by about 0.6% or $0.51/bb while the August Brent contract ended the week with an increase of 0.4% or $0.39/bbl. The August Brent/WTI widened by about $0.90/bbl for the week as the normalization process is still interrupted by the Norway strike and the official start of the Iranian embargo. Barring any change in the current geopolitics of the Middle East I still expect the spread to gradually continue to narrow over the next 3 to 6 months as the surplus in the US mid-west continues to recede.
On the distillate fuel front the Nymex HO contract was unchanged on the week even as distillate fuel inventories decreased modestly last week versus an expectations for a build in inventories. Gasoline prices increased on the week even after a small build in gasoline stocks. The spot Nymex gasoline price increased 3.2% or $0.0842/gal this past week.
Nat Gas futures decreased modestly on the week even after a smaller than expected injection into inventory. The August Nat Gas futures contract decreased by 1.7% or $0.048/mmbtu on the week and is now trading below the key resistance area of $2.85/mmbtu.
Nat Gas inventories continue to underperform history throughout the entire injection season (so far). In fact today's injection was bullish on all counts (discussed in more detail below) and continues to prolong the time when Nat Gas inventories may hit maximum workable storage capacity. This week's number was a reflection of very hot weather covering a major portion of the US resulting in a bump up in Nat Gas cooling related demand along with some lost production in the US Gulf due to the tropical storm in that region during the report period. The weather has been hot and will certainly have a bullish impact on next week's injection report as well... which is likely to come in at a similar level to this week's report.
The latest six to ten day and eight to fourteen day NOAA temperature forecast is calling for a bit of a cool down over the southern portion of the US for the period of July 11 to 15th. However, the area of the country expecting above normal temperatures is expected to widen during the July 13th to the 19th timeframe. Overall both of these forecasts are not as severe as the actual weather experienced over the last several weeks and as such cooling related demand is likely to be less during the forecast period. If so that would mean that the magnitude of the underperformance of the last several weeks will be less severe also.
Friday's EIA report was bullish from the perspective that the injection was below the consensus level and bullish when compared to last year and the five year average injection level for the same week. The EIA injection was 5 BCF below the consensus (44 BCF) and below last year's injection and below the injection level for the five year average for the same week. The net injection of 39 BCF was marginally above my model forecast (37 BCF) this week and at the very low end of the range of market projections. The inventory surplus narrowed modestly versus both last year and the more normal five year average also. The current inventory level is now 573 BCF above the five year average.
On the financial front equity markets around the world gained ground from the previous week with the US markets losing value on the week. The financial markets were mostly impacted by the announcements of new rounds of monetary easing in the midst of a slowing of the global economy. Global equity values increased as shown in the EMI Global Equity Index table below back and still remain in positive territory for the year.
The EMI Index increased by 1.1% on the week and is now back in positive territory for the year by 1.2%. Over the last week the Index increased in value in most all of bourses with only two bourses still in negative territory for the year but the overall Index still well off of its highs hit in mid-March. At the moment the global equity markets are in the midst of another round of selling that could result in the Index moving back into negative territory once again.
The euro lost ground on the week while the US dollar increased modestly. Last week the global equity markets were a neutral price driver for oil and most commodity markets. Last week was a risk neutral trading week for most risk asset markets.
I still think the oil price is overvalued especially after last Friday's huge increase. However, the combination of the growing geopolitical concern around Iran and the Middle East as well as the view that the global Central Banks are more likely to ease monetary policies further as well as initiating a new round of stimulus should contribute the market stabilizing (after some profit taking selling). For the moment the oil complex is trying to establish a new trading range and may likely push the upper limits of the range as long as the Norwegian oil strike continues, the rhetoric out of Iran continues and the macro economic data continues to support more easing.
I am keeping my view at cautiously bullish as the hot weather has persisted across major portion of the US and is resulting in a modest increase in Nat Gas cooling related demand. The inventory surplus is still narrowing versus both last year and the five year average but there is still an exposure of inventories prematurely hitting maximum storage capacity. storage.
Currently markets are mostly higher as shown in the following table.
Dominick A. Chirichella
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