Oil falls as economy and demand growth sputter

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Happiness is not a state to arrive at, but a manner of traveling.

Margaret Lee Runbeck

The oil complex and most risk asset markets are all struggling to recover from the sudden drop that hit all of the markets this week after the elections in Europe. The low of the week is still the level made during the first hour of trading on Sunday night with many markets still holding that short term support level. That said, gold has not and is now trading well below the low and below the $1,600 per ounce level. Commodities and equities have been a strong downside move for the last several weeks with most multi-commodity indices now at levels not seen since the end of last year. In other words most commodity gains for 2012 have been completely wiped out. This is certainly not a good outcome for the producing or natural resource countries but it is certainly a big positive for the consuming world in that the savings on the cost of purchase of commodities should work its way to the consumer who should now have more income available for discretionary and non-discretionary purchases. It is also a big positive in reducing the risk of price inflation.

On the equity front global markets have also been under pressure and are well below the highs hit in early March. The EMI Global Equity Index is now down 1.8% for the week as shown in the following table. The year to date gain has narrowed to 5.8% or the level it was at in the middle of January of this year. The Index has given back about 10% of its gains when compared to the high of the year hit in March. Three of the ten bourses in the Index are now in negative territory for the year...Canada, London and Paris with only Hong Kong still showing a double digit gain for the year. Canada is weak on a combination of a slowing economic outlook for the country as well as the strong move to the downside for most commodities as Canada is a natural resource dependent country. London and Paris are lower based on the lack of confidence in the EU's ability to solve the current confusion that has emerged since Sunday's election as well as the simple fact that the EU looks like it is on the cusp of moving back into a recession.

All of the markets are in the midst of a risk-off trading pattern as once again traders and investors head to the sidelines as all signs point to slow global economic growth at best. From the oil complex perspective a slowing economy will result in slowing in oil demand growth and likely underperform the forecasts...including the latest one by the EIA shown below. With the geopolitical risk in the Middle East also fading the likelihood of lower oil prices is increasing. From a technical perspective WTI has made two attempts at breaching the low from Sunday night and has failed both times. As of this morning with most risk asset markets under siege it is highly likely that WTI will make another pass at the low (around $95.35/bbl) and if breached the next level of support is not until the $92/bbl level.

Brent has been moving more slowly to the downside this week on a combination of force majeure issues in Nigeria (Shell on Bonny Light field) and the fact that both PADD 2 and Cushing crude oil stocks have been surging of late (see API inventory discussion below). I think we are coming to another peak in the Brent/WTI spread as the Seaway pipeline gets closed to start-up. But for not the spread is biased to the Brent side in the very short term.

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