Knowing what to fear.
Could deflationary pressures be building once again in the energy complex? After a spurt of green shoot related growth, it seems the economy is headed back to neutral making one wonder if oil demand will start to fall off the map once again. This morning it was reported that the U.K.'s annual inflation rate fell below the Bank of England's 2.0% medium-term target for the first time in 21 months in the month of June, while the retail price index, according to Dow Jones newswires, posted its sharpest drop since records began in 1948.
Oh sure, that pesky, nagging, little U.S. trillion dollar deficit thing may be inflationary down the road yet the bigger threat to the economy is a lack of economic activity. As the U.S. government moves to bail out CIT Group Inc. one of the largest lenders to small businesses, the creeping economic malaise seems to becoming more apparent. If that deflationary mood is reinforced by a weak Producer Price Index then oil’s technical bounce should be short lived.
Over the long term, while we are chasing windmills, Russia and China seem to be moving to secure their energy future. The Financial Times reported yesterday that, “Oil companies from emerging economies are responsible for more than half the sector’s biggest mergers and acquisitions by value this year as state-controlled companies have exploited Western groups’ relative weakness to secure control of resources. Emerging economy buyers, led by Chinese and Russian companies, paid for $24.2bn of the total $48bn value of the 50 largest oil and gas deals agreed in the second quarter, according to PwC, the professional services firm. Such companies accounted for one-fifth of the total value of deals last year. M&A advisers expect state-controlled groups to remain active in the takeover market in the coming months, benefiting from sponsor governments’ financial strength and less pressure than Western companies over short-term performance."
The FT says that the leading buyers in the second quarter were state-controlled groups, Sinopec of China, which agreed to pay $8.8bn including debt for London listed Addax Petroleum and Gazprom, Russia’s state owned oil company which bought a 20% stake in Gazprom.
Good News! Nothing blew up in Nigeria last night. Maybe that is because Henry Okah, the jailed leader of the main rebel movement in Nigeria’s oil-rich Niger River delta was freed after he accepted a government amnesty. Bloomberg News said that the Movement for the Emancipation of the Niger Delta, or MEND, made the release of Okah one of its conditions for ending its armed rebellion. Okah was arrested in Angola in September 2007 on suspicion of gun-running and deported to Nigeria in February last year to face a treason trial. Bloomberg says that armed attacks targeting oil facilities in the delta region, home to Nigeria’s oil industry, have cut more than 20% of the nation’s oil exports since 2006. The West African country has the continent’s largest hydrocarbon reserves and is the fifth-biggest source of U.S. oil imports.
Phil Flynn is vice president of Alaron Trading and a Fox Business Network contributor. He can be reached at (800) 935-6487 or pflynn@alaron.com .
