Crude Oil

There’s been a lot of excitement in the past year over the rise of North American oil production and the promise of increased oil production across the whole of the Americas in the years to come. National security experts and other geo-political observers have waxed poetic at the thought of this emerging, hemispheric strength in energy supply. What’s less discussed, however, is the negligible effect this supply swing is having on lowering the price of oil, due to the fact that, combined with OPEC production, aggregate global production remains mostly flat.  But there’s another component to this new belief in the changing global landscape for oil: the dawning awareness that OPEC’s power has finally gone into decline. You can read the celebration of OPEC’s waning in power in practically every publication from Foreign Policy to various political blogs and op-eds.

All you need to read.

All you need to read.

At the beginning of the week, European equities are seen modestly higher in the major indices with underperformance noted in the peripheral markets. Markets have sought some solace in the G8 summit over the weekend, with leaders agreeing that the optimal scenario would be Greece remaining within the European Monetary Union, and have furtively agreed that further measures may be necessary to return Europe to growth. The disagreements, however, continue to rollover as leaders fail to commit to a specific growth strategy. The tentative risk sentiment is reflected in the fixed income markets, with the German Bund remaining in negative territory for much of the session and 10yr government bond yield spread between the periphery and the German benchmark tighter on the session. Touted bids by domestic accounts helped support BTPs (Italian paper), especially in the short end of the curve, where the spread between the German equivalent is trading tighter by around 3bps. From Tokyo, comments from Fed’s Lockhart have drawn attention, who commented that with the downside risks emerging from the Eurozone, it would be unwise to take QE3 off the table.

With a lack of European data, markets have remained focused on the macroeconomic issues throughout the morning. European equities have seen mixed trade this morning, starting off sharply lower following Moody’s downgrade of 16 Spanish banks late last night. Equities have been observed on a relatively upwards trend as market talk of asset reallocation into stocks from fixed-income has somewhat buoyed sentiment, however this remains unconfirmed. The news that Spanish banks are pressing regulators to reinstate a short-selling ban on domestic banking stocks has also helped keep negative sentiment towards Spanish financials at bay, with Bankia dramatically reversing recent trends and seen higher by around 25% at the midpoint of the session...The chief of the Australia and New Zealand Banking Group has said volatile conditions in global markets have caused the wholesale funding market for Australian banks to freeze, a further sign that the European turmoil is taking its toll on global markets.

And so the unthinkable has happened: the FaceBook IPO has priced (at $38 as noted yesterday) into the ugliest possible tape imaginable, combining continuing bad news for JPM, ongoing deterioration for European risk markets (nothing new here), the need for the EU Commission to deny it is working on emergency Greek exit plans (we all know what that means) a request by Spanish banks to reinstate the short selling rule (as we predicted back in February), and a #Ref!-ing circular demand by Spain that banks deposit €30 billion into a deposit-protection fund. In other words more of the same. And yet FB has to trade up... or else. Which is why at least for the time being futures are soaring, on that, as well as on the rumor that Europe may close again today at 11:30 am Eastern. However, if 13 out of 14 previous trading days are any indication, expect the the rumor to then resurface that Europe will be opening again on Monday which will wipe out all of the day's gains since who on earth will want to be long risk over a weekend  in which many things in Europe can go bump in the night.

Overnight: just more of the same, as markets collapsed, first in Asia, then in Europe, on ever more concerns what a Greek exit would do to Europe. The most important story of the night was a report in Dutch Dagblad claiming that ECB has turned off the tap for Greek bank liquidity: "At the end of January, Greek banks had received EUR73 billion in liquidity support from the ECB, but this amount has dropped by more than 50% now, according to the newspaper. The ECB is cutting back support because Greece has been holding off on recapitalizing its banking system, despite receiving EUR25 billion in funds for that purpose, the paper says." Whether this move is to force Greece to blink (even more) by making the previously reported bank run even more acute, or just general European stupidity, is unclear but it is certain to make the funding stresses across all of Europe far more acute. The news sent all peripheral bond yields soaring, and the EURUSD tumbling to under 1.27 briefly. 

All you need to read.

As already noted, one piece of good news out of Europe - German GDP (ignore the huge ZEW miss) - was enough to make everyone forget the Italian bank downgrade, and that Greece is one election away from unwinding the EMU. Yet perhaps it is good to have a modest bounce from a market, which however not even Goldman says is oversold: after all the central planners need a day or two to regroup, and consider what currency to crush next to buy the global nominal stock market a few months of breathing room.

The failure to form a coalition government in Greece this weekend has prompted risk averse trade across the asset classes this morning with publications across Europe continuing to speculate about the potential exit of Greece from the Euro-area. As a result of this the Spanish 10yr yield touched 6.2% and the respective spreads over benchmark bunds in Spain and Italy have traded as wide as 30bps so far today. The knock on effect has been a sell-off in the financials which has seen the IBEX and FTSE MIB under perform in the equity markets with a relative safe-haven bid into the USD weighing on crude futures and precious metals. Spanish t-bill auctions and a variety of lines tapped out of Italy did stem the tide after selling around the top end of their indicative ranges but focus will remain solely on Greece given a lack of tier 1 data out of the US. Moving forward the next meeting of party heads in Greece is scheduled to commence at 1730BST, however, the head of the Syriza party has already indicated he will not be attending with the leader of the democratic left suggesting he is doubtful that a coalition can be formed.

The only good news spin this morning was that the Greek, pardon Spanish contagion, has not reached Italy, after the boot-shaped country sold €5.25 in bonds this morning at rates that did not indicate a meltdown just yet. It sold its three-year benchmark at an average 3.91 percent yield, the highest since January but below market levels of around 4 percent at the time of the auction. It also sold three lines due in 2020, 2022 and 2025 which it has stopped issuing on a regular basis. And this was the good news. The bad news was the not only has the Spanish contagion reached, well, Spain, but that everything else is now coming unglued, as confirmed first and foremost by the US 10 Year which just hit a new 2012 low of 1.777%. Spain also is getting hammered with CDS hitting a record wide of 526 bps overnight, and its 10 Year hitting 6.26% after the country sold 364 and 518-Day Bills at rates much higher rates than on April 17 (2.985% vs 2.623%, and 3.302% vs 3.11%). But the highlight of the day was the Banco de Espana release of the Spanish bank borrowings from the ECB, which to nobody's surprise soared by €36 billion in one month to €263.5 billion, more than doubling in 2012 from the €119 billion at December 31.

All you need to read and some more.

Despite the optimistic $300 million a year savings projection, there are pros and cons of this deal for Delta

All you need to read and some more.

For the third year in a row, crude oil prices have stumbled in April (-26% in 2010, -17% in 2011, and -10% in 2012 so far). Much has been made of the help this will offer the economy and consumer spending but this is ceteris-paribus linear thinking. There are a few other critical aspects to consider that make many, including Barclays, believe "there is little to the latest price action than the increasingly self-fulfilling prophecy of ‘sell it in May and go away’, exaggerated by market positioning, with broader macroeconomic concerns used as a lightening rod." With crude inventories on the high side and gasoline (and other oil product) inventories relatively low and falling - we would hold our breaths on the recent crude price drop funneling along to the retail pump price anytime soon as there is one critical aspect of the supply-demand equation that many have missed - a period of heavier-than-usual refinery maintenance which while temporary have reduced demand but tell us nothing about the state of final demand. In other words, even if a balance of sorts was achieved in terms of crude flows in March and April due to maintenance, that balance is likely to be disturbed from June onwards. The mainstream media is full of talking-heads on the chronic weakness in US oil demand, but it does not appear to be a real phenomenon according to the steadily improving flow of data and while Greece, Hollande, and US macro data has dragged out macro shorts, it would appear the fundamentals support oil prices higher from here. With the upward-sloping curve in crude to year-end and the relatively small drop this week (-1.2% only in WTI) despite all the derisking, perhaps the market is already starting to realize.