Quote of the Day.
Don't listen to their words, fix your attention on their deeds.
Today Germany's Federal Constitutional Court ruled in favor of Germany's participation in the European Stability Mechanism (ESM) with a cap of €190 billion. The ESM is a permanent €500 billion fund that offers loans to member states. The ESM may also buy bonds to lower member country borrowing costs. Germany will be the largest contributor to the fund with a 27% share. This ruling is certainly a key element for the ECB program announced last week by Mr. Draghi and now opens the door for the ECB to begin to act.
The next big event on the docket is tomorrow's Federal Open Market Committee (FOMC) meeting announcement. The market has been pricing in some additional easing by the Fed. In fact the market may be setting up for a downside correction irrespective of the outcome. If the Fed announces a new QE3 program the market could be in a buy the rumor sell the fact mode and thus result in a downside correction. On the other hand if the Fed pushes the decision down the road (my likely outcome) we could also see a downside correction in risk asset markets. Irrespective of the outcome the next several days are likely to be volatile with the potential for intraday price reversals.
The IEA just released their latest oil monthly market forecast. Following are the main highlights of this report.
Oil prices extended earlier gains in August, but crude prices seemed to plateau in the second half of the month. Brent was last trading at $115/bbl after reaching a high of near $117/bbl around mid-August, while WTI traded at $97, close to its August high. Increases in product prices outpaced and outlasted the crude rally, with gasoline, naphtha and middle distillate prices all posting steep gains.
Demand projections for 2012 and 2013 have been raised by 100 kb/d on data revisions for 2011, to 89.8 mb/d and 90.6 mb/d, respectively, though demand growth forecasts are little changed at around 0.8 mb/d for both years. Demand grew by 1.2 mb/d in 2Q12, buoyed by Japanese utility burn to replace idled nuclear generators..
Global oil supply fell by 0.1 mb/d m-o-m to 90.8 mb/d in August from upwardly revised July estimates. OPEC liquids production growth, led by Nigeria, Angola and Iraq, failed fully to offset unplanned outages in non-OPEC countries. Crude oil imports from Iran are estimated to have inched up in August to 1.1 mb/d, from below 1 mb/d in July. Non-OPEC annual supply growth slowed to just 0.2 mb/d in 3Q12.