World Economy

In spite of the agreements at the EU Summit on Friday, the risk asset markets are still somewhat skeptical with Europe, but Europe’s economic outcome is still in the forefront and still the main market driver heading into the new week of trading. The market continues to be pushed lower each time there is a comment that the ECB is not going to step up bond purchases. About the 10 time this comment has come out over the last week in various forms. The latest comment on bond purchases came from the Bundesbank overnight. It shows how the markets are still being impacted by rumors and 30 second news snippets, even those have been recycled many times. The markets are likely to remain in this environment for the foreseeable future or until Europe moves into the background.

Adding to the selling pressure overnight was a weak data point out of China. Export growth came in at 13.8% in November, or the weakest pace since 2009. China’s biggest customers, Europe and the U.S., are still in a very slow growth pattern and as such exports to these regions have declined strongly. For example, exports to the EU rose just 5% from a year earlier or only about 25% of the rate of growth from back in the middle of the summer. The slow growth pattern in the developed world and the tight monetary policy that has been in place in China for well over a year have both contributed to a slowing of the world’s economic and oil demand growth engine. This weak data point from China could move the Chinese government to switch to a more aggressive monetary easing policy. We have already seen a step in that direction a few weeks ago when the Chinese government lowered bank capital reserve requirements by 50 basis points. The China story and the potential for easing and possibly stimulus will be a story that moves more into the forefront in the coming weeks.

For the moment, the combination of the European hangover and the slowing of export data out of China is enough to send most risk asset markets lower, including oil prices this morning. Oil futures have declined about 0.9% so far overnight as OPEC readies for their December 14th meeting in Vienna. The continuation of the difference of opinion that started at the last meeting between the hawks and the doves is likely to continue in this meeting. Some of the hawks, including Iran, are calling for a reduction in oil production while Saudi Arabia has been relatively quiet on this matter. Based on the oil loading plans for Asia and Europe, next month’s volumes look to remain steady, suggesting that the Saudi’s are not planning on any immediate production cuts. With sanctions on purchases of Iranian crude oil for Europe a possibility, it is not likely the Saudi’s are going to agree to any major cut in production at this meeting. The most that is likely to happen is that OPEC legitimizes its current production levels and adjusts the official quota to match what they are already producing. The OPEC meeting will become a potential price driver over the next several days.


About JWM Energy Consultant
Professional Energy Consultant. I advise large energy-users on procurement strategies to reduce electricity and natural gas costs.

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