We’ve begun the week with currency prices showing some signs of stability and with another big lurch downward in the price of oil.
By Peter Martin
Monday, August 17, 2015
US light crude futures dropped 1.1% to $42.49 a barrel, depressed by signs of oversupply and fears of dwindling demand. News out last week showed two new oil rigs added in the US by drilling firms, taking the number of rigs to its highest since May, while the Omani oil and gas ministry said in its monthly report that the country’s oil industry produced a record 1 million barrels per day in July.
Demand fears have been sparked by soft economic growth data for key economies, including China and Japan. Japan saw GDP contract 0.4% in the second quarter, according to provisional data released last night, the first decline since the third quarter of last year. The Bank of Japan recently downgraded its growth forecasts for 2015, despite saying that the Japanese economy has ‘continued to recover moderately.’
There are seasonal factors at play that could work to pressure prices in the coming weeks. The summer driving season starts to wind down as we approach the end of August, ushering in the beginning of the Fall refinery maintenance cycle which should create a temporary reduction in crude oil usage. Looking out beyond 2015, Iran is currently looking at how to upgrade its oil refining industry in expectation of Western sanctions being lifted, so that the long-term story could still be one of increasing supplies.
The financial markets experienced a few choppy sessions last week, with volatile fx and stock prices caused by the devaluation of the Chinese yuan, but he FX market has been a lot more stable on Monday, with USD/JPY and GBP/USD little changed in early trading. The US stock market opened substantially in the red though. Shortly after the opening bell on Wall Street the Dow Jones was down 117 points or 0.62% at 17,359, while the S&P 500 Index fell 0.54% to 2080.3.
Part of the decline was down to the extreme weakness shown by one of the early steers on US manufacturing for August, which came as a big surprise after strong hard data for July in Friday’s Industrial Production report. The Empire State Manufacturing Survey, a report for the New York region based on anecdotal evidence, slumped to a reading of -14.92 for August, compared to July’s expansionary level of 3.86. The result is the weakest showing since the financial crisis, and the forward-looking area of new orders was deeply negative at -15.70, which gives little hope of momentum bouncing back quickly. The next key indicators for the manufacturing sector are the Philly Fed Survey on Thursday and the flash manufacturing PMI which is out on Friday.
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