The contrarian in me has somewhat abated, as although I believe crude prices should be moving higher based on all the uncertainty in the Middle East and Japan, we have seen a number of bearish indicators in markets generally this week which -- if released at any other time -- would send the crude market lower. So in order for us not to get too wrapped up in pointing in one direction, here's 10 reasons why crude should be falling this week, but isn't:
3. Although current events in Japan are likely to have a positive effect on oil demand in the longer run as the recovery process kicks in, a lack of immediate demand for crude due to 30% of oil refining being offline means demand destruction for the crude market.
4. All is not well in the European economy (Part 2): U.K. -- inflation is 4.4% (anything over 2% means a slap on the wrist for the Bank of England and a letter of explanation to the Chancellor), while the economy is contracting. The government has also just cut its economic growth forecast for 2011, all leading to the equation: A stagnating economy + rising inflation = stagflation.
5. Yes, the Japanese equity market may be rebounding, egging on risk appetite and lending support to global equties, but ... it is already well undervalued, due to Japan's utterly poor economic performance in recent times:
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7. All is not well in the European economy (Part 3): Rumors of an Irish bond default circulate, although denied by some camps. Despite bond yields indicating immediate problems, a bailout is unlikely until after stress test results. Meanwhile, their economy sinks 1.6% in Q4, 2010.
8. And another thing re Japan: Not only is refining down, but actual productivity has dived. Output has been hit as much as 6%, crimping economic activity, both now and for the immediate future. And the impact is much more far-reaching than just on a domestic scale, as international auto and electronic markets are materially affected.
9. Middle East unrest: The threat of Libyan oil production being offline for the majority of 2011 has now been priced into the market to a large extent, while Saudi production has increased to meet the shortfall. Upside risk to oil prices is driven by fear rather than fundamentals, should unrest in countries such as Yemen or Bahrain spill over into Saudi Arabia and impact oil production.
10. Gasoline demand in the U.S. may be strong (albeit seasonally), but we as we exit the high-demand period for heating oil, inventories are above levels seen at the same time for the last five years. Meanwhile, crude inventories are above both last year's level and well above the 5-year average, and total products supplied (a proxy for total product demand) are below last year's level and near the low end of the 5-year range. Not crazy bullish.