Shock and awesome.
Oil is still trying to get over the shock and awe of the massive ECB debt bailout. But despite the wow factor of a near trillion dollar bail-out, do not fly that mission accomplished banner just yet. Even as global stock markets opened in ecstasy, a back-slide in the euro made some wonder about the longer term ramifications of the EU breaking all the rules by rewarding some members bad debt behavior. The New York Times warned that, “for all the excitement about the scale of the effort, it is important to remember that the core fund does not now exist. The fund, known as a special purpose vehicle, would raise money by issuing debt and making loans to support ailing economies. The European countries would guarantee that fund. So the package is merely a commitment for the vehicle to borrow money if a large economy like Spain, which represents 12% of the output in the Eurozone, asks for assistance.” And what is more the U.S. taxpayers are helping back the madness.
The International Monetary Fund (IMF) is pledging 250 billion euros to support the EU and with the United States being the largest IMF member, yes, we the taxpayers of the United States, are likely to at least be partially on the hook. The Wall Street Journal said that, “The IMF is akin to a global credit union. Members kick in money. The institution's board lends it out. Each member has a "quota"—that is, a financial stake in the IMF expressed as a percentage — and contributes accordingly. The U.S. quota is 17.09%, followed by Japan at 6.12%, Germany at 5.98% and France and Britain at 4.94% each.” The Journal asks, ”Does that mean that the United States is responsible for 17% of the IMF's portion of the Greek package? Not exactly. “Basically the U.S. participation in any one deal depends on a variety of factors."
That factor and the exploding stock market gave oil a surge but despite all the outside help and the trillion dollars of economic stimulus, oil really did not follow through on its early promise. Oil bulls had to be disappointed that the market failed to test near $80 despite the huge EU package. Without even getting up to the pre-Greece crisis worry bailout highs and the perhaps renewed confidence in the old reliable greenback, oil may have a hard time regaining those lofty highs. That is despite the fact that OPEC is upping its own personal demand expectations. Dow Jones reports that The Organization of Petroleum Exporting Countries said that oil demand would grow more than expected in 2010, the first significant upgrade since the beginning of this year, as the Chinese offset persistent concerns over some European economies. In the OPEC monthly oil market report the group said it expects global crude consumption this year to grow by about 950,000 barrels a day, a increase of about 50,000 barrels a day from its report last month. Much of the increase was tied to an upgrade in Chinese demand forecasts as double-digit gross-domestic-product growth there in the first quarter led to a year-on-year demand increase of 800,000 barrels a day in March for China.
China demand expectations might not be set in stone. The Wall Street Journal reports that China's shares ended at their lowest level in nearly a year on Tuesday as stronger-than-expected inflation and new yuan lending data for April raised concerns the government could take more tightening measures to cool the economy. The benchmark Shanghai Composite Index, which tracks both A and B shares, ended down 1.9% at 2647.57, its lowest closing level since May 27 last year, when it settled at 2632.93. The Shenzhen Composite Index fell 2.4% to 1024.65.
If China starts to tighten, the ripple effect on oil demand will be felt worldwide. Not only will demand in China slow but seeing that China is driving demand, the impact of slowing China down will be felt on the rest of Asia. If they do not slow down then the risks of a China bubble will start looming larger bringing even greater downside risk to global demand and the global economic recovery.
We still feel the best way to play the market is to participate in these massive daily ranges.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org