OPEC

Because latetly there has been some confusion that the US is "energy independent"...

When last week the revised Q2 GDP print was announced, which beat expectations solidly driven entirely by a surge in net exports, we said that "with China on the rocks and tightening, the Emerging Markets in free fall, and Europe still a net exporter (so not benefiting the US), anyone hoping this trade led-recovery will be sustainable, will be disappointed." Sure enough, the first trade data update for the third quarter as of July, confirmed just this, as the trade deficit widenedfrom a revised $34.5 billion deficit, to a substantially larger monthly deficit, amounting to $39.1 billion. This was $500MM more than consensus expected, or $38.6 billion, and it means that as we predicted, the downward revisions to Q3 tracking estimates are about to start rolling in, trimming ~0.1%-0.2% from US GDP for this current quarter. Specifically, imports for the month rose from $225.1 billion to $228.6 billion while exports fell from $190.5 billion to $189.5 billion. But perhaps most notable is that in July, the US trade deficit with China and the EU rose to a record of $30.1 billion (from $26.6bn last month) and $13.9 billion (from $7.1bn) respectively.

Today's morning summary is a carbon copy of yesterday's. Some things happened, China continues to make up data to fit its current policy outlook, things in Europe continue to go bump in the night ever louder as we approach the German election despite reflexive diffusion indices - this time Service PMIs - desperately signalling a surge in confidence, Italy has just reminded everyone it is a big political basket case as Berlusconi is said to consider withdrawing his support for the Letta government and calling for elections this year, and so on, but it is still all about Syria. Last night the Senate Foreign Relations Committee has agreed on a resolution on using military force against Syria. The resolution would limit the duration of any US military action in Syria to 60 days, with a 30-day extension possible if Obama determines it is necessary to meet the goals of the resolution. In other words, a "surgical strike" lasting a minimum of 90 days, and then with indefinite additional extensions tacked on. Yet judging by the modest drop in crude and gold, the market may need more than just fighting words at this point to push to th next level of risk aversion.

If Syria is invaded by the West, then we should be getting ready for a hike in the price of Brent that some say may reach a much as $150 since it will escalate into a regional problem and affect supplies coming out of Iraq.

The increasing likelihood of some form of limited US led military action in Syria is compounding concerns about the stability of the world’s key oil producing region and Barclays warns that it will likely exert upward pressure on prices until the nature of the possible military intervention becomes apparent. But the bigger risk for the oil market is the potential for the Syrian conflict to spread to neighboring producing countries and imperil regional output, as the Syrian conflict is fueling broader sectarian tensions across the entire Middle East and has become something of a proxy war. The problem for global oil prices is that all of this Middle East volatility is taking place against the backdrop of a recent rise in unplanned outages in the oil market outside Syria. In sum, Barclays is concerned that with geopolitical tension and physical outages on the rise, crude oil markets are at an inflection point.

Even after seven years of writing macroeconomic analysis and bearing witness to astonishing displays of financial and political stupidity by more “skeptics” than we can count, it never ceases to amaze us the amount of blind faith average Americans place in the strength of the U.S. dollar. One could explain in vast categorical detail the history of fiat currencies, the inevitable destruction caused by inflationary printing and the conundrum caused when any country decides to monetize its own debt just to stay afloat - often, to no avail. The dollar is no more invincible than any other fiat currency in history. In some ways, it is actually far weaker than any that came before. The dollar is entirely reliant on its own world reserve status in order to hold its value on the global market.

If there was any doubt that the taper would take place shortly, it can be wiped out following the just released June international trade data, which showed a surge in exports to a record high $191.2 billion, an increase of $4.1 billion compared to May, even as imports declined by $5.8 billion to $225.4 billion, resulting in a trade deficit of just $34.2 billion, or 22.5% lower compared to the $44.1 billion in May, which is the lowest trade deficit since October 2009.  It is also the biggest beat to expectations of -$43.5 billion since March 2005. Whether this plunge in the deficit was the result of the new GDP methodology is unknown, however the resulting surge in revised Q2 GDP following this bean-counting addition to the last month of Q2, means that the economy grew even more than expected and that the Fed's tapering course is now assured. It also means Q3 GDP based on July trade data will be dragged down as there is no way this surge in the collapsing deficit can be sustained.

In order to maximize their long-term profit, the Saudi`s will be watching the shale-boom in the US for an optimal oil price. This will prove a challenge for an oil dependent nation as the natural gas price implies a far lower oil price than the political elite is comfortable with.

The conventional wisdom of the moment is that a weakening global economy will push the cost of commodities such as oil down as demand stagnates. This makes perfect sense in terms of physical supply and demand, but this ignores the consequences of financial demand and capital flows. The total financial wealth sloshing around the world is approximately $160 trillion. If some relatively modest percentage of this money enters the commodity sector (and more specifically, oil) as a low-risk opportunity, this flow would drive the price of oil higher on its own, regardless of end-user demand and deflationary forces. If we grasp that financial demand is equivalent to end-user demand, we understand why oil could climb to $125/barrel or even higher despite a physical surplus.

There is no doubting the massive reserves of fossil fuels still lying close to or just beneath the earth’s surface. One of the key points made in the first edition of Insight back in February is that we must factor in the cost of processing those fossil fuels before they can enter the energy market. The future of energy production is as much as about the economic cost of processing those supplies as it is about the extraction. 

• "Ooops": Barclays reveals £12.8bn balance sheet hole (FT), Barclays Bows to Pressure With Share Sale (WSJ)
• Bank of Italy Inspecting Top Lenders' Books (WSJ)
• Obama to propose 'grand bargain' on corporate tax rate, infrastructure (Reuters)
• China injects funds into money markets, quelling fears (FT)
• Berlusconi faces verdict that could endanger Italian government (Reuters)
• Shale Threatens Saudi Economy, Warns Prince Alwaleed (WSJ)
• Qatar Finds Revolution Abroad Not as Easy as Stock Picks (BBG)
• Cities Begin Hiring Again (WSJ) - not to mention filing for bankruptcy
• Big Question Hangs Over Small-Caps (WSJ)
• China Politburo Pledges to Press On With Restructuring Economy (BBG)
• Bank Revenues Surge on Trading Over What Fed Will Do (BBG)

The world can only build so much storage to store extra supply; at some point demand has to eat up this extra supply.

It is obvious that the oil market is out of touch with the fundamentals.  But this is just my analysis, let`s hear what Oil industry executives believe.

• Risk on assets supported by yesterday's speech by Bernanke, who said that highly accommodative policy needed for the foreseeable future and that current unemployment of 7.6%, if anything, overstates health of US labour market.
• ECB's Weidmann said that the ECB has not tied itself to the mast with forward guidance, which does not rule out rate hikes when inflationary pressures emerge.
• The BoJ kept their monetary policy unchanged and retained plan for JPY 60-70trl annual rise in monetary base.

A mixed picture is starting to emerge from the Middle East in terms of oil production. Several members of the 12-member OPEC oil cartel are embroiled in turmoil or struggling to ensure post-war political gains. Oil production from the Middle East declined by 1.5 million barrels per day in 2009. Production from most Middle East countries has slowed down or leveled off, though gains from Iraq have offset some of those declines. With economic recovery seemingly on the horizon, a new OPEC may be developing from the ashes of the recession.