Morning Petrospective – June 17, 2011
il prices rallied on Thursday, as traders were cheered by a better-than-expected weekly unemployment report and by upbeat housing figures. The dollar sold off, equities rallied and oil prices were in positive territory through the morning. But, as we moved into afternoon, the euro eased and the dollar gained, equities lost traction and crude oil slipped back into negative numbers. As oil markets closed, gains on the DJIA slipped from double-digit gains to single figures. The DJIA ended up 64.25 to 11,961.52 and crude ended with minor gains.
The US dollar had advanced overnight, and it sold off through most of Thursday’s session. Nonetheless, the dollar was still higher on Thursday than it had been on Tuesday. And the buying looked like short-covering (in the euro) rather than solid buying based on a resolution of the Greek crisis. That still remains unresolved and the government faces a vote of confidence this weekend. And Germany and the ECB remain divided over the extent to which private sector help should be included in any rescue package.
The best news on Thursday came on the economic front, with the Department of Labor showing a decline in first time claims of 16,000 to 414,000 in the week ended June 14th. Housing starts increased by 3.5% in May, to 560,000 from 541,000 in April, and it would have been bigger had there not been as many floods and tornadoes in May. Building permits increased, as well. Of course, housing faces a number of headwinds that are not going away, including huge inventories of foreclosed properties that are not going away anytime soon. Still. Traders were impressed by the better numbers, but at the end of the day, these numbers do not suggest that either housing or jobs will lead us to a strong recovery.
In other data, though, the Federal Reserve Bank of Philadelphia’s general economic index dropped to minus 7.7 in June from 3.9 in May. A Bloomberg survey had been expecting a reading of plus 7. The Bloomberg gauge of expectations fell to minus 31 this month, which was its lowest level since March, 2009. Bloomberg’s Consumer Comfort Index rebounded to minus 44, which was its best level in two months. Nothing in the data suggests a recovery gathering momentum, though.
The US current account deficit increased to $119.3 billion, or 3.2% of GDP, in the first quarter, up from $112.2 billion (3.0%) in the fourth quarter. Higher oil prices added $22 billion to the trade deficit, but there was a $15 billion increase in the investment surplus, to $54.8 billion, or 1.5% of GDP. That softened the impact of higher oil prices, slightly. Capital Economics noted, “Overall, a current account deficit of 3.2% of GDP isn’t necessarily unsustainable, at least not in the short term, but something is wrong when a nation with an unemployment rate of more than 9% has a deficit of that size.”
Opec increased crude oil production in May, with Saudi Arabia pumping 9 million bpd, according to the IEA. The 11 members of Opec with quotas produced 26.50 million bpd in May, which suggests compliance with quotas of just 61%. The IEA still warned that “There is a clear need for the organization to boost supply … to help meet peak summer season demand.” Including Iraq, Opec produced 29.18 mln bpd in May, the IEA said.
We still expect oil prices to work lower over the short term.
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