Much of the attention was put on political turmoil in Greece and Italy last week as regime change has raised the uncertainty of implementation of austerity measures, thus affecting the outlook of the sovereign debt crisis in the 17-nation Eurozone. Greece has eventually announced an interim government will be formed under the leadership of Lucas Papademos, former ECB Vice President. The foremost thing the new government need to complete is to ratify the EU bailout plan passed in October 26.
Italian Prime Minister Silvio Berluscon offered to resign as soon as the fiscal consolidation plan is passed by the parliament. Italy bond yields surged to a record high with the 10-year yield rising above 7%, only to retreat modestly after the ECB purchase and a successful auction of 12-month T-bills.
The headwind facing Italy, the third largest economy in the Eurozone, signaled that fears of contagion have materialized. It's indeed a story of self-fulfilling prophecy. As investors worried about deterioration in Italy debt position and its ability to pay the debts, they sold the bonds and sent the yields higher, making it more difficult for the country to tap funding from the public to repay the debts.
S&P mistakenly announced that France's rating was downgraded, triggering massive selling force on risky assets. Although a correction was announced to reaffirm France's rating, sensitive market movement indicated vulnerability of the financial markets. It appeared that investors have lost confidence on the debt problems in the region.
WTI crude oil continued to perform well last week, gaining xx%, as US inventory tightened. The forward curve remained in backwardation while the spread to Brent crude continued to narrow. Stock at PADDs contracted -1.03 mmb, paring the +1.25 mmb increase in the prior week, to 92.19 mmb in the week ended November 11. Four-week average of storage in the area has declined for 7 consecutive weeks. Cushing stock also dropped -0.93 mmb after gaining over the past 4 weeks.
While gaining for a third straight week, Brent crude has demonstrated greater volatility as the focus was on renewed worries over sovereign debt crisis in the Eurozone. Moreover, the faster than expect recovery of Libyan oil output also weighed on Brent crude. The IEA said production in the country has already exceeded 0.4M bpd in October and has also passed 0.5M bpd in November. The agency now expects Libya's output to reach 0.7M bpd by the end of this year and to 1.17M bpd by the end of 2012. According to the OPEC, 'continued increase in Libyan production' and a 'potential recovery in North Sea output' should increase the supply of light sweet crude. The cartel also indicated that the return of Libyan exports, together wih 'the end of an unplanned production outage to the major Buzzard North Sea oil field and additional West African production', were negative pressure on Brent crude prices.
The DOE/EIA reported that gas inventory increased +37 bcf to 3 831 bcf in the week ended November 4. Stocks were -6 bcf below the same period last year but +215 bcf, or +5.9%, above the 5-year average of 3 616 bcf.
Separately, Baker Hughes reported that the number of gas rigs plunged -30 units to 877 in the week ended November 11. Oil rigs soared +21 units to 1133 and miscellaneous rigs dipped -1 unit to 6, sending the total number of rigs to 2016 units. Directionally oriented combined oil, gas, and miscellaneous rigs fell -12 units to 243 while horizontal rigs dropped -5 units to 1152 and vertical climbed +7 units to 633 during the week.