Economic concerns centered on Europe and indications of slowing Chinese growth have impacted on the oil demand outlook and on risk appetite in general. Last week, oil prices were down nearly 8%. Over the past month, the drop in oil prices is 18%, the biggest monthly loss since late 2008.
The European debt crisis has escalated in recent weeks on prospects of a messy Greek exit from the euro zone and worries over Spain’s rising borrowing costs. The negative economic effects of increased financial stress and uncertainty will be substantial - denting the demand outlook for commodities. The process in Europe is complicated and will take time due to the politics involved.
The euro zone composite PMI dropped to a 3-year low in April, signaling a fast decline of private sector economic activity. The unemployment rate has risen to a record high because of the weakening economy. In April, unemployment rates were 24% in Spain, 15% in Portugal, 10% in Italy and France, and nearly 6% in Germany.
China’s economy shows signs of a broadening slowdown. Its official Purchasing Managers’ Index fell to 50.4 in May from 53.3 in April, indicating a slowdown in the manufacturing sector.
US job growth is slowing sharply, raising the risk for an economic slump in the second half of 2012. US GDP growth for 1Q12 has been revised down to 1.9%. This may reduce consumer spending and weaken investments. A new round of quantitative easing will provide support to equity and commodity markets.
Economic uncertainty has risen in Japan after a growth of 4.1% in 1Q12. Industrial production is expected to decline over the next two months. Even if two nuclear units will return to service this summer, conservation will still likely have to take place in order to avoid electricity shortages.
The Indian government announced that its economy is slowing.
There has been little movement in the Iranian nuclear confrontation in the last week, but the level of rhetoric is substantially lower pushing the issue to the back burner in comparison to the economic news.
Speculators continue to cut in their bets on oil. Net long positions are falling.