Oil prices continue to trade in an untrustworthy fashion but the drivers that are running the current mini-trend are positive enough to recoup three-quarters of the losses experienced on Monday. Even though there is reported little damage and, according to shipping data, a continuation by oil freight to use the Red Sea corridor, further barrages of missiles and drones from Houthi sources keep the tension in the Middle East in focus. Keeping accompaniment to these attacks is a lack of settlement with protestors at the Sharara field in Libya which has seen great influence in the Brent derivative of Dated Versus Front Line that was trading negatively last week but has rallied to +90c for the Balance of January, which is why M1/M2 Brent futures continues to make ground, even during the so-called roll period that normally experiences spread pressure as funds switch long positions further forward.

An interesting insight into the current sentiment is the dismissal of yet another build in US API product inventory levels, Gasoline stocks added another 4.9mb against an expected build of 2.5m and Distillate added 6.9mb against and expected build of 2.4m. Such a Distillate build in the height of winter ought to ring alarm bells particularly after the huge product builds of last week, but as stated, attitude is with the bulls at present and the API Crude draw of 5.2mb and Cushing reduction of 0.6mb captures most of the attention. The market, as is the case every week, will look to the EIA for confirmation, however, the very same agency yesterday added another small but current salient feature to the bullish outlook by forecasting a small global supply deficit in 2024 of 120kbpd. Oil prices are set to continue in jangling nerves in the near future until a trend in prices with consistency and reliability in news reveal themselves.

Europe’s gloom is never far away

It seems that thinking can never wander far from the sick man that is Europe and judging by articles of difficulties that have peppered various newswires since the beginning of the year, that thinking is hardly about to drift away and being dismissed as a bad dream. Despite poor and stuttering performances in industry and manufacturing from Germany and France, which might have been a portent to lower prices, inflation pushed higher and is becoming stubbornly reluctant to adhere to, or even attempt to achieve the European Central Bank (ECB) target of 2%. The Euro area annual inflation rate flash expectation showed it to be at 2.9% in December, up from 2.4% in November according to the estimate from Eurostat posted on January 5.

The data is not exactly uniform as there exists divergence in the monthly rates shown by an unchanged December reading in Spain (3.3%), a slight increase in France (4.1% versus 3.9%) and a jump (3.8% versus 2.3%) in Germany from November, which will lead to more accusations from the Union membership that the ECB policies are set against the plight of whatever befalls Europe’s largest economy. Yet, the ECB seems in little doubt that the last leg of getting inflation to the 2% Valhalla will not see materialisation until next year. Last month, and quoted on Bloomberg, ECB member Isabel Schnabel said, ’we still have some way to go, and we will see how difficult the famous last mile will be’, with the Vice President of the bank, Luis de Guindos agreeing, ‘we will analyse developments in wage costs and profit margins, as both factors could delay the return of inflation to our 2% target.’

Industrial production remains an issue for the once mighty German economy and fell 0.7% against an expectation of an increase of 0.2% in November. Having now seen output fall for 6-straight months, this downswing in industrial measure has only seen the like since the financial meltdown of 2008, and what has exacerbated the situation is the inability of the government to offer stimulus after the recent High Court decision that mothballed an expansive budget meaning a balanced book must prevail and with it a continuance in lack of investment. If Europe is the sick man of the world, then the subset is Germany as the sick man of Europe.

All well and good then for bullish oil thinking, a steadier conservative fiscal backdrop in Europe runs counter to how the US Federal Reserve, or more importantly FED speculators, ‘dot plot’ decreasing rates which implies a devaluation in the US Dollar and a prop for the commodity world that is priced in the mighty greenback. However, a stark outlook for investment in Europe, poor growth and a citizenship adversely affected by continued higher interest rates should not mean that strength in the Euro is a given.

The stubborn European inflation has seen increased wage demands from the public sector and with them likely higher unemployment and healthcare costs which have to be funded somehow. ING, via Reuters, estimates that 150 billion Euros of debt will be sold into the bond market in January alone, and with the ECB in a state of quantitative tightening and a continent bereft of confidence, it is hard to imagine investors falling over themselves to hold the Euro rather than the US Dollar with such debt issuance floating around. This circular woe is hardly conducive to oil demand, even if the USD/EUR exchange rate obliges bulls for the overall economic sickness within Europe will badger notions of oil demand even if the influence of the old world continues to dwindle.
 

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