Market Currents – Back to the Future Edition

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bttfYou are probably aware of this, for there has not been as big a frenzy on the internet since the last Star Wars trailer was released, but October 21, 2015 is the date when Marty McFly went ‘Back to the Future‘. Financial markets are responding in kind and taking us back to the future in relation to a whole plethora of data releases.

Starting off with overnight action, and you’d have to go back to last September to see a worse print for Japanese exports. Japanese exports last month came in at their slowest pace for a year at +0.6% (YoY). Imports were slightly better than expected…but still ugly at -11.1% (YoY). This means Japan’s trade balance is at a deficit of 115 billion Yen.

Japam exports Japanese exports, % YoY (source: investing.com)

Another quiet day on the data front for both Europe and the US leaves us to watch Brazil’s inflation rate drifting higher like a released balloon, hitting 9.77%, the highest level since early 2004.

88On to energy-specific releases, and we get the weekly EIA oil inventories today. Last night’s API report appears to be taking us back to the future again, as another whopping build appeared from the report, similar to last week.

The appearance of a 7.1 million build is leading to adjusted expectations from today’s report, which was expected to yield a lesser +3.5 million. Both gasoline and distillates are expected to show a corresponding draw as we plumb the depths of fall refinery maintenance season.

Saudi PPsAlthough the Northeast and Midwest are expected to experience some cooler temperatures in the coming week, an El Niño-sponsored warm pattern is set to lead us into November with warmer conditions. Tomorrow’s storage report is set for another solid injection. My guess? It’s gotta be 88 Bcf!!

As well as Doc, Biff, Marty, et al dominating the news today, they are joined by a laser-like focus on Saudi and the waning strength of its economy. The IMF has published a regional economic outlook on the Middle East and Central Asia, in which it scrutinizes the impact of lower oil prices on the region. Saudi comes under the microscope, given both its status as the largest producer in OPEC, as well as its reliance on oil to meet 80% of its government revenues.

The IMF report highlights that Saudi may run out of financial assets within five years should the government maintain current policies. As the graphic on the left from the Wall Street Journal illustrates, foreign reserves are charging lower as Saudi’s budget gap is at a 20% deficit to its GDP.

The chart below is from the IMF report, and highlights how long each country can rely on their assets before they run out amid the current low oil price environment; this is in the form of a ‘fiscal buffer’. The chart also plots the fiscal breakeven price of oil needed by each country. Even those countries in the strongest financial position – Kuwait, Qatar, and UAE – need a higher price of oil to meet their current fiscal responsibilities (their coffers look awfully robust though).

This ongoing struggle to understand who is currently winning the global oil market battle is no better typified than through three contrasting headlines on Bloomberg today.  One bellows ‘Saudis Risk Draining Financial Assets in 5 Years, IMF Says‘, another calmly informs us ‘U.S. Companies See Saudi Opportunities Even With Spending Cuts‘, while another exclaims ‘OPEC Is About to Crush the U.S. Oil Boom‘. The crude market shrugs its shoulders, and sells off strongly instead thus far.

OPEC

Looking for a silver lining, one can always be found, and today’s IMF report presents the below glass half-full perspective. For the drop in oil prices has given a number of countries the opportunity to unwind costly subsidies which have been in place. This not only immediately lowers government spending, but will hold these countries in better financial stead going forward, as it frees up cash for growth-enhancing investments instead.

ME subsidies

Finally, the #epictweetoftheday comes from James Herron, who tweets ‘Venezuela’s President on state TV: Oil price at $40/bbl cuts into investments, which could spur climb within months to $150 – $200‘. (I told you it was epic).