Crude, Oil & Energy Insights

With the Euro nicely recovering from its low of 1.18, the momentum that pushed gold beyond 1,256 dollars an ounce is now gone. Combine this with deflationary pressures in the US and the upcoming elections in November and we should see weakening in Gold from its current level to its pre-Euro zone crisis level of 1050.

It looks as if crude oil prices are ready to head lower, this time all the way down past 65 dollars per barrel of crude oil. From a momentum point of view the recent rally in oil has not been able to break past 80 and the rash of bad news about the US economy will certainly lead to downward revision in demand forecasts. The dismal economic data in July has replaced fears of rapid inflation in the near future (caused by excess liquidity in the system and low borrowing rates) with concern for disinflation or deflation.

Recent US Economic Data:

US Unemployment: 9.5%

Current US Trade Balance: -42.3B (Prior US Trade Balance: -40.3B)

Retail Sales Number: -0.5%

Actual Factory Orders: -1.4%

Prior Factory Orders: 1.2%

Producer Price Index: -0.5%

07/15 Industrial Production: 0.1% (Prior: 1.2%)

Then there is the Baltic Dry Index debate. Is it excess shipping capacity coming online, China storage or more bad news waiting across the curve that has pushed BDI prices to historic lows for the last 5 weeks. And that is just the US outlook. While the uptick in Euro has addressed currency concerns in Europe, the long term impact of Euro-zone austerity measures and the shrinkage in growth side by side by measure to reign in growth in China are all going to lead to a revision in global oil demand growth for 2010 as well as for 2011. After BAML, Goldman and many others, UBS is now also willing to tow the line by bringing its price forecast down from the loft 90 dollars per barrel of oil to the mere 80’s.

Lower oil prices anyone?

Crude Oil Macroeconomic forecast model

Given the nature of our economy, one key factors effecting the economic outlook of Pakistan is the country’s balance of payments in particular the balance on its current account. In turn the major factor impacting the surplus/ deficit of the current account has been its sensitivity to oil price changes due primarily to increased imports in crude oil and related products. The current account surplus (increase in net foreign assets) impacts M2 growth which in turn effects inflation and plays a role in the determination of the central bank’s policy rate.

The ranges of results for the first quarter of fiscal year 2010 – 2011 from our macroeconomic forecast model’s simulated runs are as follows:

The crude oil outlook for the first quarter of the new fiscal year

US, China, Japan and Australia all had “growth” news and numbers with Australia even mentioning the “I” word. Crude oil NYMEX July futures trading between 74 and 75 per barrel.

Goldman cuts its Euro target to 1.15 on anticipated future euro “policy mishaps”. Three economic indicators and two policy rate decisions are due today including:

U.S. weekly jobless claims due at 1230 and U.S. April international trade.

Italy and France April industrial output and GDP for first quarter.

European Central Bank (ECB) and Bank of England June interest rate decisions.

American Petroleum Institute inventories drop by larger than expected numbers (4.5 million barrels versus 1.3 barrels of crude oil) while Oil hovers around 72 dollars a barrel in New York. Euro bounces back to 1.1973 on news of intervention and calming comments by Fed Reserve Chair Ben Bernanke on the pace of recovery in the US economy that are expected to help whet investor risk appetite.

So the next likely stop for the falling Euro is 1.15 after the 1.18 barrier is breached according to technical analysts. But the same analysts also feel that 1.18 also represents a great entry point for a bounce back for the European currency.

But just in case you are still bearish on the European currency, here is a list of euro lows over the last 8 years posted on the CNN Euro watch blog

Euro halts it retreat from the sub 1.19 levels to bounce back to 1.1960 in trading in Asia after touching 1.1875 on Monday. NYMEX Crude Oil future contracts for July delivery recover and are stable at 71.5 dollars a barrel range.

Given the beating euro has taken over the last few weeks, analysts have now started talking about exchange parity with the US dollar just as they spoke about euro at 1.2 to a dollar when euro broke the 1.30 barrier. On other fronts the weakness of Australian dollar against its major trading pairs (the US dollar and Yen) does not indicate any near term strength in oil and is a reasonably bleak trading signal for commodities. The only exception to the rule is Gold, which so far has been able to stay steadily above 1200 dollars an ounce.

The weak US payroll report from Friday, the budget deficit crisis in Hungary over the weekend and the resulting weakness of Euro kept prices under pressure in Asia in morning trade. Oil broke 70 dollars in Asia on Monday morning trading. New York’s main futures contract, light sweet crude, July delivery in July, fell 1.82 dollars to 69.69 dollars a barrel in morning trade.

Brent North Sea crude for July delivery shed 1.46 dollars to 70.63 dollars.

If the trend keeps up we should see 65 before Friday. Remember from the 6^th – 8^th both USO and OIL ETF’s rollover their future exposure to the next month in order to avoid taking delivery, which means that prices should remain weak for the next two days.

Alternatively if the Hurricane season in the Atlantic starts off with a bang this month, we are just as likely to see a reversal. The mid week inventory report by API and EIA should also help push prices up if they show a larger than anticipated decline in inventory and stockpile figures.

We are all expecting Spain, Italy or Portugal to take a fall. We didn’t expect the already fallen to trip the Euro. Hungary did just that this Friday by announcing that it was having trouble meeting its public deficit goals agreed as part of the IMF bailout in 2008. The Hungary reaction spilled over into Poland and Czech Republic, sparking broader concerns about the economy and growth prospects within the Euro-zone as well as for Euro.

The double hammer for Euro was yielded by the below expectation US job reports that led to a flight to quality with investors switching back into US dollar and US treasury as forecasted earlier. Euro touched 1.1966 in late trading in New York on Friday evening. While in the long run the decline in Euro will give a much needed boost to Eurozone exports and reduce balance of payment issues by making imports more expensive, its impact will be painful in the short run on account of the slow down and the forced austerity measures in Europe.

Euro breaks the 1.20 barrier to touch 1.1973 in New York at 3 pm on Friday afternoon. The weak job reports kick off the rise in US Treasury prices (drop in yields) and a steep decline in US indexes. In commodities crude oil futures for July deliveries fell by more than 3 dollars to break the 72 US dollars barrier.

Stocks, Euro and commodities slid in unison on a weak US job reports when non-farm payroll only added 534,000 jobs compared to analyst expectations. Euro touched a four year low compared to the US dollar while Oil prices slid to a lower level after some initial excitement in the morning before the US jobs data was released.

The US unemployment rate is expected to fall to 9.8% in May from 9.9% in April. Estimates range from 9.7% to 9.8.% and analysts are forecasting a rise in non-farm payroll by 615,000. In case of any disappointments in the US jobs report, US treasury prices and US dollar would both trade higher on account of risk aversion and push commodities and other currencies lower. If expectations are met or exceeded trades may go either way. If the tone is global recovery the dollar may go up or down depending on investor outlook and risk appetite.

The euro has held above $1.2000 support level, and has so far traded within the $1.2150 to $1.2450 range. Given the weekend and the focus on US Jobs report, if it has to break 1.20, all it needs is the right US jobs report and one more breaking news on Europe before market open in New York.

Crude oil future contracts closed higher on US economic data (Auto and Housing numbers) a decline in distillate and crude oil inventories in the US, a 3.7% rise in gasoline pump sales kicking off the driving season and a first in 10 week decrease in WTI inventories at Cushing, OK. US housing numbers come out Friday morning and will set the tone for crude oil trade as well as currency markets on Friday.

Next week is the future roll over for crude oil ETF’s for both OIL and USO and we will see some pricing pressure on future prices as both funds rollover their future contracts to avoid taking delivery.

Euro falls from the 1.2306 to 1.2264 in early morning trading in Tokyo. Not as steep a fall as we expected but we may see some action when New York opens later today. At the same time the reaction is fairly muted compared to the whiplash we saw earlier. In the news today there is coverage about another 195 billion Euro in bank losses as the second wave of the economic crisis hits the Eurozone.