Triple Crown Slowdown
The Department of Energy made it official as all three reporting agencies are seeing a slowdown in energy. First OPEC then the International Energy Agency and now the Energy Information Agency (EIA) arm of our own Department of Energy! Yet what may be a bit more unnerving to the oil market are some slow data and ominous words out of China. A report on China exports showed a 17.1% increase that was way below market expectations and the August reading of 24.5% growth. The reading was so disappointing that it came with a warning from the Chinese Custom Agency to be prepared for severe challenges going forward. Sprinkle on top more concerns coming out of the Eurozone and recent oil price surge might be coming under pressure.
The mood shift in the market has really been evident in the Brent/WTI spread. The spread exploded again as the Slovakian vote seemed to suggest that Europe might not implode. At the same time we're rolling over with strength in the Brent as well as the market putting on a risk trade because of the rising tensions over the Iranian assassination attempt allegations.
The EIA says the expected pace of global oil consumption growth for 2011 is slightly lower in this month's outlook, while projected total supply in 2011 is higher, resulting in some easing of oil market tightness. Despite this easing, EIA continues to expect markets to rely on inventories to meet some consumption growth in 2011 and 2012. Oil consumption growth from countries outside of the Organization for Economic Cooperation and Development (OECD) is projected to outpace the growth in supply from producers that are not members of OPEC, implying a need for OPEC producers to increase their output to balance the market in 2011 and 2012.
Oil prices continue to face upward price pressure due to supply uncertainty and downward price pressure because of lowering expectations of economic growth. Upside uncertainty to the crude oil price outlook remains as a result of ongoing unrest in oil-producing regions. Heightened turmoil in Syria, which produced an average 400 thousand barrels per day in 2010, and the potential for more sanctions on the country's energy sector is one source of risk to non-OPEC supply. At the same time, downside demand risks predominate, as fears persist about the rate of global economic recovery, contagion effects of the debt crisis in the European Union, and other fiscal issues facing national governments. On the supply side, there may be downward price pressure if Libya is able to ramp up oil production and exports sooner than anticipated.
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.