Oil inventories higher than before summer

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Oil prices have been under pressure all week so far as the market awaits tomorrow’s EIA oil inventory report along with both the EIA and IEA monthly oil forecasts. The one constant throughout the vast majority of the recovery in oil prices, which began about 18 months ago, has been the overhang of US and global oil inventories as demand has yet to catch up, let alone surpass, supply. As the market now enters the lower demand shoulder season and with the summer driving season in the history books and the winter heating season still months away it is highly unlikely that supply and demand will move more toward a normal balance anytime soon. As such, I am not expecting the inventory overhang to recede in the foreseeable future.

As the growth rate of the global economic recovery continues to falter, even the perception view trade that has been the main catalyst behind the year and half oil price recovery is in question. Not only has the majority of the macroeconomic data around the US been suggestive of a strong slowdown in the US economic recovery, but once again yesterday the market has raised concerns over the banking system in Europe and the overall sovereign debt issues that have been looming over this part of the world for most of 2010. The sovereign debt problems in Europe have not really gone away they have just been off of the media radar for the last several months as some of the economic data coming out of the EU was not as bad as expected (much like the situation in the US). However, also much like the US the EU economy is in slow and grow mode, at best, especially since the institution of major austerity programs in many EU member countries. The sentiment in the financial markets has improved a bit over the last several weeks but both the developed and developing world economies are not improving at the same pace as what was experienced during the second half of 2009 and early 2010. Thus the pace of oil demand growth is also not evolving at the same rate as it was over the same timeframe.

Global equity markets have been languishing so far this week as shown in the EMI Global Equity Index table below. The Index has lost 0.2% so far this week, widening the year to date loss to 3.5%. Canada and Germany remain the only two bourses still in the positive column for the year to date with China and Japan still showing double digit year to date losses. However, China’s Shanghai A shares are currently off of their worst levels of the year and are not in bear market territory showing a loss of 17.9% versus well over 20% for most of 2010. Stocks declined in Asia on concerns that the strong yen will dent Japanese exporter profits while European equities are in negative territory as both Ireland and Portugal signaled that banks may need more capital to offset depreciation of their bond holdings. The banking concerns continue for the second day in a row. European stocks were also pressured by negative export data out of Germany and lower than expected manufacturing data out of the UK. Equities are not supportive for oil prices but the US dollar is under a bit of pressure this morning offsetting some of the negativity in the oil complex coming from the faltering equities markets.

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