Crude Oil

Remember all those European PMIs which imploded over the past month, destroying any hopes of a rapid rebound from Europe's technical recession? You can forget them now because the one indicator which tracks the level of the manipulated stock market more than anything else, German IFO business survey, just came better than expected, at a whopping 109.8 compared to expectations of 109.6 print, same as the previous one. And that is all it takes for futures, and the EURUSD to ramp, which in turn plants the seeds for another confidence ramp next month and so on. Here is Goldman's take: "The assessment of current conditions remained unchanged at 117.4, while expectations increase to a level of 102.7 after 102.4. Looking at the different sectors it shows that confidence in the manufacturing sector was broadly stable on a high level (14.0 after 14.3), while construction saw a small decline after a surge over the last couple of months (2.3 after 3.3; confidence stood at -13.2 in October). Confidence in the retail sector also recorded a strong gain (106.6 after 3.7), while wholesale saw a decline (12.8 after 15.0). This is a strong report with business conditions remaining significantly above their long-term average of 101.1. The rebound in business conditions after a soft spot during October to January is indicative for a rebound in the underlying momentum in the economy." Well, no, if anything it is indactive that Germans were happy to reap the benefits of a few trillion in liquidity which in turn pushed markets higher, and making Germans even more confident despite the big miss in German PMI in March. But for now a big drop in the market is unwelcome so let's focus on reflexive, Catch 22 indicators. Even Goldman is perplexed on the spin: "Only the release of the 'hard' data in the coming weeks will show which survey is giving the correct signal with respect to the underlying momentum of the German economy. But in any case, the March IFO argues against taking, at least for now, the PMIs at face value."

All you need to read and more.

All you need to read and some more.

BarCap said it expects precious metals to be one of the commodity price leaders in the second quarter, citing the "resumption of the kind of currency debasement/inflation concerns that have been the big driver of gold and silver prices over the past 12 months". It recommended that investors take a long position in December 2012 palladium, saying lower Russian exports should push the market into a supply deficit and bring prices "significantly above current levels" by later this year. BarCap put a second-quarter price of $745 per ounce for palladium futures on the London Metal Exchange, versus the past four weeks' average of $701. Spot palladium on the LME hit a session bottom below $645 on Thursday.

Yesterday we discussed extensively how the narrative of US decoupling, which has so far trumped everything else, is finally fading, is coming to an abrupt end, and with no other "plotline" to take its place, as China, Europe and corporate profits are all in the dumps, the only option is for more easy money to come soon. However, with crude sticky this will be a problem in an election year. Today, this sentiment has become even more acute as new Greek 2023 bonds have for the first time trade over 20%, with weakness spreading to all the other PIIGS, and talk of yet another LTRO already picking up pace. The question of what if any assets European banks is luckily ignored for now. So as futures turned red once more, here is Bank of America summarizing the bearish market sentiment this morning.

European cash equity markets were seen on a slight upward trend in the early hours of the session amid some rumours that the Chinese PBOC were considering a cut to their RRR. However, this failed to materialise and markets have now retreated into negative territory with flows seen moving into fixed income securities. This follows some market talk of selling in Greek PSI bonds due to the absence of CDSs. This sparked some renewed concern regarding the emergence of Greece from their recovery. Elsewhere, we saw the publication of the BoE’s financial stability review recommending that UK banks raise external capital as soon as possible. This saw risk-averse flows into the gilt, with futures now trading up around 40 ticks.

While T.Boone talks sense and gets to vent his frustration regularly on air, the sad reality is that although the obstacles for substitution to NatGas are not insurmountable, as Michael Cembalest notes we do not get the sense that an NGV fleet is imminent, even with very high gasoline prices. The best shale gas plays are the ones that involve finding liquids in addtion to (or instead of) dry gas. Given the price for coal, natural gas and crude oil per unit of heat/energy humans would stop using oil and gasoline and use more natural gas instead. But in the real world, in which Michael and you and I live oil and natural gas are not frictionless substitutes. As the EIA shows, oil is primarily used for transportation whereas natural gas is used mostly by industry and to create electricity. As a result, there is no substitution effect pulling up natural gas prices, particularly as more natural gas is being found in shale plays. But for shale investors, there are liquids that can be found in shale plays that are worth a lot more than dry gas: shale oil, and natural gas liquids. Shale oil obviously is valued based on oil prices, and natural gas liquids are valued close to oil prices as well. Whether over time natural gas can displace coal or be exported successfully to 'correct' the demand-supply equation is the question that remains but for now it seems a long way off and along with the normal operating risks, there is of course a broader issues of fracking - and what operation safeguards will need to be put in place to allay concerns in the future. The point is that demand possibilities are there but seem far off and while broadly the energy sector has been on a positive ride the last few years, we remember the lost two decades of underperformance during the 80s and 90s but it would seem should we 'dip' again in the global economy that integrated oils, drilling/services will underperform from their elevated levels.

Futures continue exhibiting a very surprising and ever brighter shade of ungreen as the morning session progresses, starting with the 5th consecutive contractionary Chinese PMI data, going through disappointing European Manufacturing and Services PMIs which came below expectations (47.7 vs Est. 49.5 for Mfg; 48.7 vs Est. 49.2 for Services), with an emphasis on French and German PMIs, both of which were bad (German Mfg PMI 48.1, Est 51, prior 50.2; Services PMI 51.8, Est. 53.1, Prior 52.8), and concluding with UK sales which printed at -0.8% on expectations of -0.5%. And just like that Europe is "unfixed", prompting economists such as IHS' Howard Archer to speculate that following "worrying and disappointing" Euro PMI data, the ECB may cut rates to 0.75%, as Europe is finding it hard to return to growth after the Q4 contraction. And with that the beneficial impact of the €1 trillion LTROs is now gone, as Spain spread over Bunds has just risen to the widest in over 5 weeks, and the beneficial market inflection point passes - prepare for LTRO 3 demands any minute now.

Going into the US open, most major European bourses are trading in modest positive territory this follows the publication of a Goldman Sachs research note titled “The Long Good Buy” in which the bank outlines its thoughts that equities will embark on an upward trend over the next few years, recommending dropping fixed-income securities. We have also seen the publication of the Bank of England’s minutes from March’s rate-setting meeting in which board members voted unanimously to keep the base rate unchanged at 0.50%; however there was some indecision concerning the total QE, with members Miles and Posen voting for a further increase to GBP 350bln, however the other seven members voted against the increase. Following the release, GBP/USD spiked lower 35 pips but has regained in recent trade and is now in positive territory.  Looking elsewhere in the session, UK Chancellor Osborne will present his budget for this financial year at 1230GMT. We will also be looking out for US existing home sales and the weekly DOE inventories.

Canada's natural resources minister told delegates at the International Energy Forum in Kuwait that his country was on the cusp of becoming an "energy superpower." Canada ranks No. 6 in terms of global oil production, but much of its crude exists in the form of oil sands. European leaders are considering a measure that would classify oil sands as an environmental issue, prompting Canada to threaten to take the issue to the World Trade Organization. With the U.S. political system in a deadlock over Canadian crude, the Ottawa government is now working to convince the international community that the global market is in jeopardy if polices "discriminate against oil sands."

There are two main news updates dominating early newsflow: the first comes from BHP Billiton, after the world's largest miner raised concerns about the possibility of a sharp slowdown in demand from top metals consumer China. Per Reuters: "There is a slowing trend in China ... moving increasingly away from the growth model that they have had, which may be a little less metals intensive. This is not new, but recognition by big mining companies would have had an effect." Australian iron ore miners, key beneficiaries of China's modern-day industrial revolution, signaled on Tuesday demand growth was finally slowing in response to Beijing's moves to cool its economy. BHP Billiton said it was seeing signs of "flattening" iron ore demand from China, though for now it was pushing ahead with ambitious plans to expand production." That this comes just on the tail of JP Morgan warning of a hard landing in China is curious, and one wonder if the Federal Reserve Bank of JP Morgan is not fully intent on telegraphing that the next big center of QE will be the PBOC. The other news is that the perpetual crude "upside capacity" strawman Saudi Arabia 'has pledged to take action to lower the high price of oil, which has risen to around $125 a barrel, with laden supertankers set to arrive in the US in the coming weeks. ... Saudi Arabia said yesterday it will work "individually" and with the other petrol-rich Gulf states to return prices to "fair" levels. The country indicated earlier this year that $100 a barrel was the ideal oil price." There is one problem with this as expected Saudi attempt to help Obama's reelection campaign: as pointed out yesterday, it is very unlikely that Saudi Arabia has any realistic ability to do much if anything to push the price of crude lower, especially if and when the middle east hostilities flare up.

No conclusions here, just a simple chart showing monthly Saudi Arabia crude oil production based on OPEC data, which has been rangebound in a tight 8,000 - 9750 tb/d range, superimposed with Brent prices over the past decade. The last time Brent soared to record highs back in the summer of 2008, Saudi production peaked at 9,522 tb/d (despite similar promises for spikes in crude production and exports). During last spring's spike, Saudi produced around 9,000 tb/d. In the past two months, production has been at record highs, even as oil keeps setting new highs, entirely due to liquidity, but not because speculators are evil incarnate as Nancy Pelosi will want her brainwashed fans to believe, but simply because for the most part they are Primary Dealers, and other entities attached at the hip to the Fed, who serve as Ben Bernanke's transmission mechanism of record liquidity being dumped into the system. Our advice: if anyone is hoping that Saudi Arabia can pump the 12,500 tb/d needed if Iran truly goes offline, buy a bike, as failure from Saudi to satisfy lofty demands will promptly send unleaded to new all time highs. Couple that with the Treasury debt ceiling fiasco in 5-6 months, and those Obama InTrade reelection contracts may seem a tad rich.

With a economic calendar devoid of virtually any events, the only two events worth of note this morning are the Greek CDS auction (where RBS appears to once again be confusing price and discount), and the Apple cash announcement due in just over an hour. The result is Apple stock which in the premarket session has traded as high as a new record high og $606, even as concerns emerge that the growth phase is over as the company transitions into a MSFT-type, post-Steve Jobs existence. Details of the 9 am call can be found here. Aside from that risk is broadly flat as hungover American traders take their seats.

All you need to read.

A snoozer of an overnight trading session for now, with Asia rising modestly, Europe green and the now priced in futures levitation as US traders walk in. Nothing material to report, except the usual - the European leverage reality continues to deteriorate: as has been long discussed the taxpayer cost to rescue Greece keeps rising, and the latest and revised figure of the bailout is €172.6 billion, €43 billion than previously thought by some (as we have pointed out from the beginning the true cost of the bailout will hit €210 billion). We will shortly point out the total disaster that the Greek balance sheet is with 7 classes of debt outstanding post the OSI. More disturbing is the "austerity" report out of Spain, where we just learned that total public debt has hit €735 billion at the end of 2011, with regions debt at €140.1 billion, which means that public debt rose to 68.5% of GDP, from 61.2% a year prior.  As Peter Tchir says: "We are still in no one cares mode, but the exposure the core has to the periphery is growing by the day.  Germany's exposure is growing because of Target 2, and Spain and Italy are busy guaranteeing the debt of their banks. On the surface, all is calm. Below the surface it is messier than ever.  They are doing everything possible to keep that mess covered because if it rises to the surface, it will be harder to control than ever before." As a reminder, this is precisely what happened in early 2011... and early 2010. You can only keep trillions of underwater debt under the rug for so long.