The market is not exactly paralyzed but uncertainty makes investors understandably and justifiably pragmatic. It appears that they find it unnecessarily risky to leave positions open for more than a day or maximum two. Two days of marching higher was followed by two days of profit-taking. Fears of supply disruptions subsided but rest assured they have not gone AWOL. Attention turned to financial data yesterday and it casts a long shadow over economic prospects. Business activity in the eurozone keeps shrinking, and in the UK it is expanding slower than before. Composite PMI in the US, which covers the service and manufacturing sectors remains resilient although the latter still contracted in October. Initial jobless claims came in below expectations and tell the story of a solid labour market.

The optimist would say that the US economy, which seems to be standing on solid footing, lends support for the rest of the world, even when considering the unpredictable outcome of the US election in less than two weeks. The pessimist argues that the bigger picture, which includes Europe and China, must be the salient driver of sentiment and it is anything but encouraging. The realist refuses to be drawn into the discussion. She simply watches price differentials because she believes that they are the true reflection of the underlying mood and the fundamental backdrop. She notices that crack spreads have weakened but are now stabilizing at lower levels. She also keenly follows the structure of the two crude oil contracts and registers the fact that the backwardation is narrowing, albeit it is still a fair distance from flipping into contango. She knows that when it happens, supply fears will have abated, and prices will start trending lower. For now, to commit herself in either direction, other than on an intra-day basis, would be deemed irresponsible, she concludes.

France and Germany Haunt Europe, Haunt Oil Demand

Hot on the heels of a Fitch Ratings warnings, France has been the subject of another debt warning from ‘Scope’ the European rating agency. In Fitch’s report of October 11, France’s long-term foreign currency Issuer Default Rating (IDR) was downgraded to negative from stable. The report describes fiscal slippage in the year so far and policy risks have therefore increased. This refers to a rise in debt of 118.5% of GDP and despite some effort to bring some consolidation by taxing large companies, pausing index related pensions and introducing a hiatus in local government and healthcare spending, the agency refers to political fragmentation and that a minority government will be unable to deliver a package to include the previous listed fiscal adjustments to be some 2% of GDP because of a lack of political will and consensus. ‘Scope’ has come down in agreement. Last week the agency reduced France’s rating to AA from AA- citing similar concerns regarding budgetary slippage, high fiscal deficits and the steady rise in debt to GDP.

Just across the way, there is hardly a border anymore, Germany’s economy once again treats the economic world with disappointment. Its Producer Price Index fell by 0.5% against a forecast of -0.2%. This offers an annual reduction of 1.4% and puts the inflation marker back into the vicinity of 2022. Destatis, the Federal Statistical Office of Germany, lists the major reason for the fall as the decrease in domestic costs in energy prices. With CPI coming in at 1.6% in September and lower than the 1.9% recorded for August, the battle to bring inflation under control seems won. Indeed, the last time the consumer index was lower was in February 2021. Such news ought to bring much cheer for Germany bearing in mind its inflation struggles had been a barrier to the ECB cutting interest rates. However, the rapid rate of decline in inflation now poses the question of whether Germany is in the first throes of deflation. It is not such an outrageous notion when taking the state of Manufacturing PMI into account. In September it plunged to a 12-month low of 40.6. Within the HCOB commentary accompanying the data an accelerated rate of decline in new orders is noted, new inflows of work fell by the greatest rate since a year ago accompanied by investment reticence, customer destocking and weakness in the automotive industry.
Car sales can be relied on as an indicator for economic health, even in these times of EV transition. According to the European Automobile Manufacturers’ Association (ACEA) report in September, European new car registrations for August were down by 18.3%. Within that dramatic decrease, Germany registrations were down 27.8% and France’s only just less so by 24.3%. Avoiding slipping into EV comparisons, which incidentally were also dramatically down, the car market decline by motor fuel offers a sobering warning on oil demand. Overall, in Europe Gasoline car sales dropped 17.1% with reductions of 36.6% in France and 7.4% in Germany. In the Diesel car category Europe as a whole saw a decline of 26.4%. This ties in with recent OPIS data on Diesel consumption falling by 4.7% in France and by 4.6% in Germany.

France’s GDP growth in 2Q24 was just 0.3%, the same as it was in the first quarter and in Germany 1Q was -0.1% and flat in 2Q24. Recession might not be a technical fact but the economies of the largest trading countries of the Eurozone sure do give an impression of one. Declining economies and very much lowered sentiment indices as seen in the GfK consumer climate being -21.9 in Germany and 95.1 (100 being neutral) in France consumer confidence indicator heralds diminished industrial, manufacturing, economic and personal expectation that may not change for some time. This can only be harmful for any hopes of a revival in oil fortunes for Europe. France will be extremely tricky for the ECB as it does not wish to encourage spending, but with German PPI reducing, the pathway to cutting interest rates is a little easier. If the ECB, as suspected, becomes a little looser with financial policy than that of the US Federal Reserve, the rampant US Dollar will kick on again and along with the troublesome influences listed above, make any idea of increased oil thirst in the old continent redundant.
 

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