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Our market view - week 26

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Another week of falling oil prices as a darkening economic outlook points to lower than expected energy consumption worldwide.


Weak data from the world’s top oil consumers the US and China and shrinking business activity across the euro zone indicates lower than expected energy consumption worldwide. Disappointment over the economic situation, the euro zone crisis, high risk aversion and strong downward momentum all mean investors are staying away from commodities. Brent has so far fallen 10% this month and is now down over 15% in 2012, despite a strong rally through the first two months of the year. It has slipped almost 30% from this year’s peak above $128 in March.

The current price is well below OPEC’s target, and we could be close to a bottom if Saudi Arabia reduces output. OPEC agreed in its last meeting to maintain the 30 mbd production ceiling but is currently producing 1.8 mbd above this, cushioning the impact of the Iranian oil embargo.


Business surveys show the fifth consecutive month of declining activity across the euro zone. Falling new orders and employment dent confidence and enhance the downturn in the private sector. Activity in Germany and France is slowing. The danger of Greece crashing out of the euro zone eased after pro-bailout parties won the elections, but risks are mounting that Spain, the euro zone's fourth-largest economy, will need a full-blown international rescue.


The euro area slump poses particular problems for China and other Asian countries used to relying on exports to fuel their economies. Japan last week recorded its first monthly trade deficit with the European Union since at least 1979.

Recent data backs the view that China could be in for an extended slowdown, with pressure on both the domestic and externally oriented economy. Chinese manufacturing contracted for the eighth month in a row in June. Export orders sentiment was seen at the weakest level since early 2009, according to the HSBC Flash PMI – the earliest monthly indicator of China’s industrial activity. The PMI survey disappointed those who hoped that official efforts to support growth were gaining traction. Chinese economic growth is widely expected to have slid for the 6th straight quarter in 2Q12.

In a move to bolster growth Beijing has pushed to boost private investment, infrastructure projects have been fast-tracked and banks' required reserve levels cut three times since November. Interest rates have been cut for the first time since the 2008/09 financial tsunami.


US factory output grew at its slowest pace in 11 months in June. The US Federal Reserve signaled a weaker outlook and disappointed some investors hoping for more aggressive steps to boost the economy. Jobs data was little changed, suggesting the labor market is struggling to regain momentum.

Oil prices are rising today on supply disruptions as a storm threat shut a quarter of US offshore crude and gas output while a strike in Norway closed the Oseberg and Heidrun fields, accounting for 150,000 bpd of oil production. Oseberg is one of four grades used to determine Brent prices.


Weak demand outlook pressure gas prices

Gas for delivery this winter hit the lowest level in 16 months on weak demand amid economic downturn. Since the beginning of April, winter-12 prices have dropped by 15% from 75 p/th to 63 p/th.


Spot prices move more with the current supply-demand situation. Demand for gas remains very weak at around 25% below seasonal norms. Supply shortness due to a drop in Norwegian imports kept spot prices firm last week.