Yesterday's price reaction within the oil market was rather counterintuitive. The overnight API data suggested the US had over the previous week, which included Thanksgiving, built stock across the main categories, yet the market continued to show positive leanings. When the official EIA Inventory Report was unveiled, not only was the Gasoline build of 2.36mb much lower than the API 4.6mb, the headline Crude EIA reading was of a 5.07mb draw, whereas the API predicted a build of 1.2mb but curiously WTI and Brent gave away nearly all the gains of the day with products actually falling beyond the previous day's lows. The EIA readings can be explained away by the pop in refinery runs which increased on the week by 2.8%, but not so the reaction. Smothering all factors in US oil assessment is the continued rise in national production which hit another record of 13.513mbpd. This reminded the market that a pro-oil incoming US President will likely ease the path for that amount of output to again increase. Left with relying on a ceasefire between Israel and Hezbollah, and a rather tenuous notion of an OPEC+ delay of cuts into the first quarter being bullish for any length of time, our market underwent a redress and now sits awaiting the actual news today from the cartel (estimated at 11.30gmt), rather than being an expectant crowd waiting to be thrown a positive bone. The widely envisioned ousting of the French government of Michel Barnier indeed saw fruition and because it was so telegraphed there was little change in EUR/USD exchange rate, but as highlighted below, the effervescent American currency will continue to plague bullish intent for commodities.

The Euro is quivering

When a fiscally functioning Eurozone is witnessed, it normally hails a decent prop for oil prices. Not only in terms of demand, but because strength in the single currency acts a as a foil to whatever upward pressure the US Dollar feels. The troubling news from Europe means that pricing of cuts from the European Central Bank see predictions of a reduction in interest rates to the tune of 160-basis points across 2025 in the swap markets. There does seem to be an element of self-fulfilling prophecy of the Euro reducing in value to parity with US Dollar. The ECB may only have one tool in its armoury and that is to cut rates in order to stimulate a stagnant economy surrounded by negative influence which are not only fiscal but also political. It is hard to line up the problems facing Europe in order of importance, the barbarians are not just at the gate, they are over the wall and in the sewers.

According to HCOB data, the Euro Zone’s manufacturing sector continued to decline in November. The PMI reading of 45.2 versus October’s 46.0 records yet again another contraction in activity. Production, inventories, new orders and spending all declined in unison and the biggest economies of Germany, France and Italy saw downturns consistent with overcapacity reducing backlogs and production costs. The Service PMIs yesterday did little to assuage the sadly reliable notion of a continent in economic decline. In terms of GDP growth, the European Commission envisages an improvement to 0.8% for 2024 against 0.4% of 2023, but it is derisory increase. Annually, with France growth expected at 0.4%, Italy at 0.4% and the extremely worrying contraction of 0.1% in Germany for 2024, the future does not bode well for any sort of renaissance, a fitting word for the continent.
The CAC 40, the French bourse, is down 3.5% year-to-date, the Italian FTSE MIB up 12.48% and Germany’s DAX up 20% and while the DAX is comparable in performance to the US’s Dow Jones, all three of Europe’s main stock indices fall short of the S&P and Nasdaq. Indeed, the STOXX Europe 600, made up of companies from 17 European countries is up only 8% for 2024.

Politically, even if there is a smoothing of the situation in France, the continent is not out of the woods. There are only two months until the national election in Germany and if markets are concerned about nationalism, and so-called ‘right-wing’ parties gaining traction in Europe’s biggest economy, it can only have a deleterious effect on the shared currency. The European elections in June 2024 saw a consolidation of right wing thinking with populism and EU scepticism rising in Hungary, France, the Netherlands and Italy to name a few. This tears at the very fabric of the union’s idealism and with it the appetite for fiscal and currency unification.

Coming up hard and fast on the rails is a Donald Trump Part II presidency. The bellicose celebrity politician is no Europhile judging by some of his language in the past and the old continent is shuddering under what might be as the spectre of tariffs begins to loom large from the western horizon. If the Trump administration makes good on levies for imports from Europe, its economy will undergo even more stress, and can there be any solution for the ECB other than to cut rates? Currently rates are set between 3.25 and 3.65%, if the swappers are right and 160-basis points of cuts occur next year, then interest rates will average out at under 2%. If hardship continues then some of the outlandish predictions regarding an ECB looking once again at accommodative policies such as taking interest rates into negative territory, the worsening outlook for the Euro is understandable.

The single currency is the second-most important in the world. The Euro makes up 57.6% of weighting for the US Dollar Index and has always been heralded by the Brussels champions as the real alternative to the greenback. Under such circumstances as listed above, such argument is made moot. No doubt we will look at other currencies that are under direct threat from a rampant US Dollar, but for now the Euro can no longer be relied on to be a resilient adversary forex pair and markets will have to look elsewhere for buffers that might just contain King Dollar and its oil price suppressiveness.

Overnight Pricing