Worries Return
Did you think you could put Brexit behind you? Well you can’t, especially when there are more worries in other EU economies. The market again is worried about the Brexit fallout as talk of bad loans in Italian banks raise concerns about the stability of the entire Eurozone.
The Wall Street Journal reports that 17% of bank loans in Italy are “sour”. That is nearly 10 times the level in the U.S. where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the Eurozone, Italian lenders account for nearly half of total bad loans according to the Journal. There was also a FT report about a “leaked letter” from the European Central Bank insisting that the Monte dei Paschi di Siena’s bank cut its gross bad loan exposure — which amounted to 47billion euro at the end of last year — by 30 per cent by 2018. MPS was already planning to dispose of €3.5bn in the worst-performing loans by then. The ECB letter implies a deeper cut may be needed.
The concerns about financial stability in the Eurozone is causing another risk off sell off in oil to start the day while gold and silver soar in a bid for safety. The British pound has fallen to 31-year low as the UK faces economic and political uncertainty. Oil, which has been on a solid path towards rebalancing because of lower U.S. output and stronger than expected global demand, may detour if more European banking problems develop.
Crude oil prices may have found some resistance in the fact that the Baker Hughes Rig Count survey had its biggest jump all year. On Friday Baker Hughes reported that drillers increased oil rigs by 11 rigs but reduced natural gas rigs by 1.
Still we have ongoing concerns about Nigerian production. Reports that rebels attacked another pipeline is raising concerns that Nigerian production might fall again. The Voice of America reports that militant group, the Niger Delta Avengers, is calling for greater development in the oil-producing south and has vowed to reduce Nigeria’s oil production to zero unless its demands are met. The group claims it attacked five oil installations in the past three days, 3 owned by the Nigerian state oil company and two facilities owned by Chevron (NYSE:CVX).
That offset news that rival oil company factions in Libya may work together to get more oil flowing. The deal may raise Libyan oil output by 700,000 barrels. These concerns should keep oil from falling too far as long as we don’t see a total meltdown in global markets.
We should also see another drop in U.S. oil inventory as we will continue to see the delayed impact of the Canadian wild wires and record demand for gas in the US. The inventory report will be delayed but should show a 3-million-barrel drop in crude supply and a 2.5-million-barrel drop in gas and distillate supply. Refiners should up run by 0.5%.
Natural gas pulled back as we saw a cool down in the Midwest and the pacific. Yet the heat will return so use the weakness to position for the next price spike. Oil trades will be in a range. Stability in stocks mean stability in oil. Despite the jump in rig counts U.S. oil output will slow further. While the market sentiment is weak, long term we still have a structural low in oil.