Quote of the Day.
Obstacles are those frightful things you see when you take your eyes off your goal.
As the last major event of 2012...U.S. fiscal cliff negotiations... continues to inch closer to some sort of deal, oil prices as well as most risk asset market have been in a modest uptrend this week so far. Further supporting crude oil prices in overnight trading was the larger than expected decline in crude oil stocks reported by the API late yesterday afternoon (see below for a more detailed discussion). While the negotiations continue in the U.S. today's EIA inventory report could move into a position to have an impact on the short term direction of prices especially if the actual outcome is outside of the range of expectations. Today the spot Jan Nymex WTI contract expires.
The macroeconomic calendar is drying up pretty quickly as we head toward the long Christmas holiday period beginning next week. Today the German business confidence indicator rose more than expected providing a modest level of support for the euro as well as European equity markets. The euro has risen for eight days in row and is a positive price support for the oil complex as the euro and oil prices have a high level of directional correlation.
As I have been discussing in this report for weeks there will be some sort of deal to prevent the U.S. fiscal cliff from triggering at the end of the year. Both side have been talking (which is always a good thing) and both side have made some concessions from their original position... although they are still not close enough to call it a deal. The Republicans will be voting on a so called “Plan B” later this week to be used in the event that a deal is not reached. The Plan B calls for extending the tax cuts for all income levels up to $1 million dollars per year. If passed (which it will be as the Republicans hold the majority in the House) this could offset the fiscal cliff if a deal is not reached and as long as the President does not veto the bill.
This is not a bad strategy by the Republicans as it would then put the decision to allow the fiscal cliff to trigger squarely in the hands of the President. Interestingly this is also a plan that high ranking Democrats have suggested during the course of this year... including House Minority Leader Pelosi and Senator Schumer that they agree with and support. The game of give and take will continue for a few more days as both sides try to get a deal done with the most gains for their respective side. The global risk asset markets have been trading more and more based on a view that a deal will get done. I remain of that view.