Oil suffers from slowing Chinese consumption

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The markets just can't push the negative sentiment emanating from Europe into the background. The one-two punch of ongoing debt problems in Europe along with a slowing of the global economy is just too large of a headwind for the majority of the risk asset markets to catch much of a bid. The markets have been mostly lower since the euro started a new down leg last Friday. After mostly mediocre flash PMI data yesterday the UK reported a 0.7% contraction in its Q2 GDP which followed a 0.3% Q1 decline putting the UK now solidly in a double dip recession...the second in four years. In addition the German business climate gauge dropped more than expected in July. Aside from all of the debt issues the European economy is clearly in a contraction mode with more and more countries dipping back into recession.

In Asia today the IMF said China's slowing economy is now exposed to significant downside risk and relies too much on investment. The IMF went on to say the government needs to initiate a growth spurt in consumption and move individual savings out of the housing market. According to the IMF the leaders of China have taken their foot off of the brakes but have not put their foot on the accelerator. Achieving a so called soft landing will be a very challenging objective for China.

From an oil perspective the slowing Chinese economy will definitely result in a slowing of oil consumption. Further oil imports may have peaked for the short term as reported in an article in Bloomberg overnight. Net oil purchases declines by 12% in June  versus May or the largest drop since October of 2010. China is reducing imports as its SPR is quickly filling. China will add about 40 million barrels of oil to its SPR over the next 6 months compared to 85 million barrels over the last 6 months. The fill rate is slowing which should reduce overall global oil requirements.

Late yesterday a WSJ released an article that indicated that the US Federal Reserve is growing very impatient with the slowing US economy and is moving closer to taking new steps to try to jump start the economy as well as the jobs market. According to the article conversations within the Fed have turned more intensely toward the question of how and when to initiate another round of easing. The FOMC meets next week (July 31-August 1) though they could wait until the September meeting to gain the benefit of having more economic data points before making any moves. There are certainly several options on the table that could be taken but for the market the main questions will be will they act and when. I have been of the view that a new round of QE was 50/50 at best. The WSJ article reads more like it is almost a certainty with the when part the only yet to be resolved variable.

For the short term... especially leading up to next week's Fed meeting... the QE crowd should provide a floor on most risk asset markets like oil, gold and other inflation sensitive markets. It could also stop the precipitous decline we have seen in the euro as more QE would certainly be a negative for the US dollar... at least for a short time frame. So once again the markets will move into QE watch mode for the next week... at a minimum.

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