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Morning Petrospective – August 3, 2011

August 3 2011, 08:24

Morning Petrospective – August 3, 2011

he US Senate voted to pass the bill passed last night by the House of Representatives to raise the nation’s debt limit. As we noted yesterday: Two weeks ago, this news would have propelled prices higher – across a wide spectrum of assets, but starting with equities and including oil. This agreement came too late, though. The momentum and market psychology have changed. Oil prices were lower on Tuesday. Equities were hammered. The economy is sinking quickly and history might suggest that a recession is a difficult time for austerity.

The US dollar ended higher on the day, and that helped push oil prices lower, but it was the weakness in the stock market that really made the biggest difference. The DJIA was down 265.87 to 11,866.62. It was the eighth straight decline in equities, and was only the sixth time we have seen eight days lower in a row since 1981. Prices broke below the 200-day moving average, broke a major technical neckli9ne on a head & shoulders pattern – which gives us an objective to 10,700 – and it broke below 12,000. All in all, it was an extremely bearish day for equities and this is sure to have a negative effect on consumer sentiment or confidence.

The 2-year treasury note also dropped to a record low yield as traders bought it as a safe haven. And gold, another safe haven, was driven to yet another record high. But gold was not propelled on fears of inflation specifically. People just were not sure where to put their money. They were looking for safety first. And the US economy looks weak, with recent data and events in the stock market likely to make it seem even weaker.

June’s US personal income and spending figures showed weak consumption growth in June. Real spending was unchanged in June and was up only 0.1% in the second quarter. Capital Economics wrote on Tuesday that recent figures in an environment of austerity will translate into very low growth ahead. It now projects US growth for 2011 at just 2.0% for the full year.

Saudi Arabia has increased its oil output to its highest levels since the early 1980’s, it was reported last week. The kingdom was estimated to have produced 9.85 million bpd in July. The last time it produced as much – 9.9 million bpd – was in 1980 in response to the Iran-Iraq war. Prior to that war, Iran had produced 6.0 million bpd while Iraq had produced 3.5 million bpd. Neither has produced at those levels since 1980. Saudi Arabia insists it can produce as much as 12.5 million bpd, if needed. In April, 2003, after the Iraq war started, Saudi output reached 9.745 million bpd.

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