Early last week, China announced a long-awaited stimulates plan which gave investors some fantasy on economic recovery. However, they took just one day to realize there's no quick therapy for slowdowns. Stock markets reported another week of losses. DJIA fell 5%, S&P 500 dropped 6.2% while the Nasdaq lost 7.9%. RJ/CRB Commodity Index also fell 5.2% last week. Disappointing earning results, downgrades of guidance as well as worse-than-expected economic data made us doubt if the worst has been priced in.
This week's focus is on G-20 meeting. Aims for the meeting are to find ways to revive the economy and to chart a map to avoid future financial crisis like the one we are facing. The leaders believe it's appropriate to use fiscal measures and monetary policy to deal with current situation. Others stressed the need for more regulation for the financial sector. This meeting paves the way for more work in coming months and another summit in the early months of 2009.
Crude Oil
It's apparent that OPEC's 'minimum acceptable oil price' has been adjusting down, from above $100/bbl in September to $70-90/bbl in October and now above $50/bbl. The cartel which controls more than 40% of the world oil production has lost price determining power since crude oil price peaked at 147.27 in July. The phenomenon intensified after Lehman Brothers collapsed in September and worldwide stimuli failed to get satisfactory results in restoring economic growth. Demand has now dominated price outlook, not supply.
WTI crude oil for December delivery dived 6.6% from a week ago to settle at 57.04 Friday. Investors were pessimistic on oil price outlook especially when IEA cut its global oil demand forecast for the third straight month. The agency lowered its 2009 estimate 670 000 bpd to 86.5 M bpd and lowered its 2008 full year forecast for the 8th time this year, by 330 000 bpd to 86.2M bpd. This was IEA's largest cut in demand forecast in 12 years and was done in response to IMF's change in GDP forecasts announced earlier. The agency said that if there's further change in IMF's GDP forecast, adjustment to demand will be made.
Economic outlook turned worse and we saw more companies announced layoffs. Fidelity Investments will start a second round of staff cut and eliminate 1700 jobs early 2009; Citigroup plans to reduce about 10% of its global workforce as the bank tries to return to profitability and IBM confirmed that the company recently notified workers that 38 people at its Research Triangle Park operations were terminated employment.
The US Commerce Department said Friday that retail sales in October fell by 2.8% last month Led by a drop in auto purchase, this was the biggest decline on record. In the Euro-zone, data showed that it has fallen into the first recession in 15 years as GDP contracted 0.2% (QoQ) in both Q2 and Q3.
Fragile economy and investors' confidence made us bearish on the outlook of crude oil price. As long as minor resistance 65.56 holds, downside bias remains and crude oil should extend weakness to 54.67 and then 53.69 first. We do not rule out the possibility for the black gold to reach $50/bbl.
OPEC will be meeting on November 29 in Cairo to defend oil price. As we mentioned in previous articles, it takes time for oil price to react to the cut in production and OPEC's cut will cause spare capacity which is negative in nature. 'How weak demand is' is a 'mystery' and there's no clue on how much output should be cut for a perfect balance. Moreover, different members have different agendas and execution of the cut remains a long-existing problem.
Analysts have been aggressively revising down oil price forecasts. BNP Paribas expected crude to average 65/bbl this quarter and reduced its 2009 outlook by 21% to an average 75/bbl for WTI crude. The bank anticipated a price recovery in 2H09. Standard Chartered also reduced its 2009 projection by 29% to 60/bbl from 85/bbl. The bank believed demand increase in emerging market by 2010 would help boost oil price to 80/bbl on average.
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