The oil market rejected breaking down to lower levels as the Fed worries about inflation and the market worries about threats to supply! Labor strikes in Libya at one point reduced oil exports by 70% causing a rebound in oil products as Europe may look to the United States to up product exports. You could see that quit clearly in RBOB the weak sister of the complex. Overall the Energy Information Administration was bearish but not as bearish as the American Petroleum Institute version and a drawdown in Cushing lending some support. Still it was the Fed that cemented a floor and gave confidence to the buyers. Now we look to Europe to see if its central banks have the same sway.
U.S. economic data was strong. GDP and the ADP jobs numbers blew away expectations. That raised fears that the Fed would taper, killing the energy demand that those numbers in a normal world might suggest. Yet oil seemed to focus more on supply threats at that point as Libya labor strike cut into supply. Bloomberg Reported "Libya, holder of Africa's biggest crude reserves, has closed all oil terminals except Zawiya amid labor protests, according to Oil Minister Abdulbari Al-Arusi. Zawiya, capable of handling 300,000 barrels a day, is operating, while the largest port, Es Sider, and others including Ras Lanuf, Marsa Brega and Hrega are shut, the minister said at a press briefing in Tripoli. The closures will reduce exports by some 1.1 million barrels a day from yesterday's level of 1.425 million a day, he said." AFP reported that Libyan oil exports plunged by more than 70% after protesters forced the closure of shipping terminals, Prime Minister Ali Zeidan said on Wednesday." "Groups closed the ports of Ras Lanouf, Zueitina, Al-Sedra and Al-Hariga, forcing a drop in production to less than 30 percent" of normal levels, Zeidan told a press conference in the capital. Oil Minister Abdelbari al-Aroussi said "Libya is exporting today only 330,000 barrels compared with the average of 1.42 million barrels a day." He said the port at Zawiya is the only one still functioning.
Then the Fed took center stage. It seems that the Fed is disturbed by the fact that we are not seeing any inflation pressure. The Fed said in its statement that the Committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term. Yet what if it does not? You see now it may take more than upbeat economic data to inspire the great taper. It may take inflation. The Fed seems worried that despite its best efforts to buy mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month that it is not stirring any inflation. Perhaps that is the clearest sign that there are still major problems with the economy and the only thing that is keeping us from a deflationary tail dive is Fed bond buying. Without any inflation pressure and a still too high employment rate why would the Fed even think about tapering? There would be no reason to. In fact based upon their inflation fears, instead of tapering perhaps they should be ramping up bond purchases to shock the economy out of its dis-inflationary haze.
Yet there are signs that at the very least commodity price inflation is coming back, Commodities in the month of July has their best month this year. Oil is getting more support from better than expected manufacturing data from China and Europe. That comes as EU and central bankers start to look into where they should release the minutes from their meetings like the Fed to provide more transparency.
CNN Money writes "Are China's factories speeding up or slowing down? It depends on who you ask. China's official purchasing managers' index got a boost in July, rising to 50.3 from 50.1 last month, according to the National Bureau of Statistics. Any number over 50 indicates an acceleration in the sector. But investors typically pay attention to two separate purchasing managers' surveys conducted in China: the state's measurement, and one performed by global bank HSBC. At the moment, the indicators are telling two different stories. The HSBC manufacturing PMI, also released Thursday, dropped to 47.7 in July -- its weakest performance in 11 months. Most of the time, both surveys deliver results that indicate factory activity is either picking up speed or decelerating. But the surveys occasionally diverge. With one index above 50 -- the dividing line -- and the other below, that's what happened in July.
“Part of the discrepancy can be explained because the official government gauge is heavily weighted toward large enterprises, while the HSBC survey taps a smaller sample size and places greater emphasis on smaller firms. The two surveys also use different methods to perform seasonal adjustments -- a way to smooth data and make it comparable from year to year. According to economists at Societe Generale, the two surveys diverge about a third of the time, usually due to differences in these adjustment techniques. This month's disparity "reflects the high level of uncertainty over China's growth outlook, although it is unclear why it emerged," said Nomura economist Zhiwei Zhang. "The rise in the official PMI is puzzling," Zhang said, particularly as other indicators suggest China's economy is slowing. Stock markets in China rose after the manufacturing data were released, with the Shanghai Composite Index advancing about 1%. Hong Kong's Hang Seng Index also turned up near 1% before settling around 0.6% midday. Beijing is worried over slower growth, and recent economic data has prompted the government to introduce some mild stimulus measures. "These targeted measures should boost confidence and reduce downside risks to growth,' HSBC's top China economist Qu Hongbin said in a statement.”
In March, China's government set a growth target of 7.5% and plans to maintain on average 7% expansion over the next three years. China's second-quarter gross domestic product rose 7.5%, a slower rate than the 7.7% posted in the first quarter of the year. Whatever you believe though there is no doubt that the report gave copy and oil a bounce.
Nat Gas report today! Is it possible that despite all of the record low temperatures around the country that has killed demands that the low of gas may be near? Joe Silha of Reuters writes "U.S. natural gas prices are expected to creep higher for the remainder of this year and again in 2014 as demand continues to improve after extremely low prices last year have attracted more users, a Reuters poll of analysts showed. Prices have bounced back from last year's decade lows as chilly late winter weather increased heating needs and whittled down record inventories to below average levels by the end of March. Price forecasts have cooled somewhat due to falling utility demand and strong production, primarily from booming shale output. "Most analysts this year have been surprised by supply. Despite the reduction in drilling rigs, production hasn't fallen off," said Teri Viswanath, analyst at BNP Paribas in New York. The Reuters quarterly poll put the consensus forecast for spot prices this year at Henry Hub, the benchmark U.S. supply point in Louisiana, at an average of $3.87 per million British thermal units. That would be up slightly from the April poll estimate of $3.84 and up about 40% from the 13-year low average of $2.77 posted in 2012. For the first half of this year, Henry Hub prices have averaged $3.75, up 55% from the $2.41 average at the same time last year, according to Reuters data. In 2014, tighter rules on emissions should favor gas, a less polluting fuel, and force more coal plants into retirement. That should boost baseload gas-fired power demand and help drive prices up about 8% to $4.20. Estimates for 2014 were down about 1% from the April poll average. Prices in 2015 were expected to gain another 7% to $4.48 as economic activity picks up and utilities continue to shift to cleaner burning gas instead of coal to generate power. Of the 27 participants in the poll, there were 13 upward revisions for 2013, eight downward revisions and four unchanged. Two did not participate in the previous poll. Price estimates for 2013 ranged from a low of $3.68 to a high of $4.15.