Oil weakness continues after inventory builds

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Most of the risk asset markets including oil have been struggling all week as market participants continue to evaluate the evolving sovereign debt issues in Europe as well as the slowing of the global economy. The spot WTI contract has remained below the $80/bbl level for the fifth trading session in a row while Brent has managed to push back above the $90/bbl level as the Norwegian oil workers remain on strike for the last four days shutting in about 180,000 bpd of oil.

Overall oil supply is still plentiful even with the Norwegian strike and the official start of the EU Iranian crude oil purchase embargo scheduled to begin on July 1. In fact Iran has announced that their exports may decline by 20 to 30% due to field maintenance which according to Iran is timed to coincide with the start of the EU oil embargo. On the other side of the equation global oil demand is continuing to weaken as the global economy continues to weaken. Oil markets are settling into a new trading range with WTI likely to remain in the $75 to 85/bbl range while Brent is carving out a range of $85 to $95/bbl for the short term. The next several weeks will determine the trading range that will most likely hold for the medium term as the market evaluates the impact of the Iranian oil sanctions, how long the Norway strike lasts (probably not all that long) and the impact of the slowing global economy.

The EU Ministers meeting set for Thursday and Friday could also have an impact on the short term direction of oil and the broader risk asset markets. If something of substance comes out of the meeting it could result in a short term rally in most risk asset markets. However, history has told us that the vast majority of the EU Ministers meeting have not resulted in any major new solutions and the odds are that this meeting will end with lots of discussions and nothing new like euro bonds or a political union, etc. Germany's Angela Merkel seems mostly focused on continuing the austerity programs, getting the peripheral countries budgets in order and adding a modest level of stimulus as discussed last week with the big four pre-meeting. In addition the ECB meets on July 5th and they could also surprise the market with a rate cut as well as some form of stimulus program. The outcome of next week's ECB meeting could potentially have a larger impact on the direction of risk asset markets than this week's EU Ministers meeting.

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