You thought I was kidding you when I said oil was targeting the $85.00 per barrel area. Nope, not really. We got a lot closer to that pretty quick as old worries and fears came back and gripped the market. Despite all the talk about a third quarter tightening of supply, current weaker than expected economic data and the mess in Europe makes one wonder why we believed the Greece crisis was solved in the first place. Fear was on display as the vix rose and the oil market plunged and the dollar soared as traders sought safe harbor from the confusion that is Greece.
Oil traders should have known it was going to be a tough day when the Empire State Manufacturing Index just screamed dismal. The Federal Reserve Bank of New York's general economic index plunged to minus 7.8 hitting the lowest level since November. New orders decreased to minus 3.6 in June from 17.2 the month before.
If the data is weak then perhaps we will get a QE-3 and that should surely improve the price of oil. Well don't count on it as inflation is rising. How transitory will inflation be as rising food and energy prices are sinking into the core rate and into the national psyche. The consumer price index increased 0.2 percent which was double what was expected and the core rate which excludes food and energy jumped 0.3 percent which was the biggest jump since July, 2008. A rising inflation rate will hog tie the Fed and if the trend continues we will have to slog through weak growth without that extra shot of Federal Reserve caffeine.
Riots in Greece which reminded traders of the "flash crash" and a crashing impression of what euro oil demand expectations might be and the lack of a credit rating in Greece. Fears of contagion will put the market at bay until traders figure out how Greece will restructure and solve their debt problems. Instead of a deal to provide rescue funds to save the country, talks broke down and broke confidence in the euro. The Greek riots may take away the will of the Greek government to make the cuts that will be necessary to get outside help. Greek Prime Minister George Papandreou's friends are abandoning him and the turmoil is created more downward pressure on commodities. Bloomberg News reported, "Greek Prime Minister George Papandreou's decision to reshuffle his Cabinet and demand his allies vote confidence in his government fueled dissent within his Socialist ranks and roiled financial markets. The yield on Greece's 2-year bond topped 30 percent for the first time on concerns Papandreou's grip on power was slipping, threatening passage of a new austerity plan aimed at securing a second aid package and avoiding the euro-region's first default. The resignation today of two members of Papandreou's parliamentary group, prompted Socialists lawmakers to demand an emergency meeting with the premier. The political turmoil came as European Union talks on forging a new bailout to prevent the first euro-area default stalled. The impasse over the aid formula and speculation that a government shakeup would disrupt passage of budget cuts and asset sales sent Greek bonds and the euro plunging. EU's Economic and Monetary Affairs Commissioner Olli Rehn said in an interview that Greece would receive its next bailout payment.
Papandreou sought to reassert his authority in a televised address last night hours after police used tear gas to break up protests in central Athens and media reported he was in talks to step down in favor of a unity government. He said he would reshuffle his Cabinet and then call a confidence vote in parliament. He has yet to announce the details of the government shakeup."
Bloomberg also reported, "The International Energy Agency raised its forecast for global oil demand growth to 1.3 percent annually over the next five years on economic expansion in China, cautioning that gains in prices threaten the recovery. Consumption will increase to 95.3 million barrels a day in2016 from 88 million barrels a day in 2010, with China accounting for about 41 percent of the gain, the Paris-based adviser to oil-consuming nations said in its Medium-Term Oil Market Report today. Crude prices are "weighing" on the developed nations that make up the Organization for Cooperation and Development, the agency said." "The resilience of emerging economies, which navigated relatively unscathed through the rough waters of the Great Recession of 2008 to 2009, will likely alter the balance of global economic power," the IEA said. "Prices around $100 are weighing down an already-fragile macroeconomic and financial situation in the OECD." Global oil consumption will increase 1.2 million barrels a day, or 1.3 percent, annually over the next five years, the IEA said. That's 700,000 a day more than the agency's last forecast for 2010 to 2015 in December and will leave a "fairly thin"cushion of spare production capacity, it predicted. "This expected rise in demand will be the consequence of sustained economic growth," concentrated in Asia, the Middle East and Latin America, according to the IEA.
But it is OPEC to the rescue. Bloomberg reports, "The Organization of Petroleum Exporting Countries boosted crude production in May as Saudi Arabia pumped 9 million barrels a day, according to the Paris- based International Energy Agency. Daily production from the 11 OPEC members bound by quotas was 26.50 million barrels a day last month, the IEA said in its monthly report. That implies a compliance rate of 61 percent, compared with a revised 63 percent in April, when output was 26.38 million barrels a day. "There is a clear need for the organization to boost supply as refining operations ramp up to help meet peak summer season demand," the IEA said. "There have been reassuring signs that Saudi Arabia and some other producers will rise to the challenge in the months ahead to help fill the gap left by the ongoing absence of Libyan supplies." Libya's output declined to 100,000 barrels a day as armed conflict curtailed exports. The country produced an average 1.6 million barrels a day in January.
OPEC's members including Iraq pumped 29.18 million barrels a day in May, an increase of 210,000 barrels a day from 28.97 million in April. "Saudi Arabia, Nigeria, Kuwait and Iraq offset lower United Arab Emirates and Angolan output," the IEA said. The group's spare capacity stands at 4 million barrels a day, according to the IEA. OPEC, provider of about 40 percent of the world's crude, couldn't agree at its June 8 meeting in Vienna on new production targets. The group set its biggest-ever supply cuts in late 2008 amid a collapse in global demand. The decision capped production at 24.845 million barrels a day for all members except Iraq, which is exempt from the quota system. Compliance percentages are based on combined output from the 11 members that committed to reduce from a base production rate in September 2008 of 29.045 million barrels a day.
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