High expectations will not be met – risk appetite and oil prices can come under pressure

Oil prices rose by more than USD 2/barrel Friday as Fed Chairman Ben Bernanke hinted at more action in his speech at the annual Jackson Hole Symposium Friday. Bernanke indicated that the Fed is ready to ease policy again, however, he did not provide any new information on the form or timing of any easing.

We expect the bar for a third round of quantitative easing (QE3) is high, and the Fed will instead extend its forward guidance of low rates from late 2014 to mid-2015 at the 12-13 September FOMC meeting. Friday’s employment report will give us a good indication of what may be expected at the next FOMC meeting, but if we are right the outcome of the FOMC meeting may have a bearish effect on oil prices as many players are expecting QE3 to be introduced. Bernanke’s message that the Fed keeps the door for further action managed to support the optimistic mood in the market and thereby oil prices.

Chinese manufacturing continued to show signs of weakness in August as the purchasing managers’ index (an indicator of industrial activity) fell to 49.2 in August from 50.1 the month before. (Values below 50 indicate contraction in the manufacturing sector).The sub-index for new orders dropped to 48.7 from 49 for the same period and the reading for export orders disappointed the most, remaining at 46.6 for the second month in a row.

Increasing oil demand from emerging economies, especially China, has been the growth engine for oil demand after the financial crisis and thus the slowdown in the manufacturing industry weakens the outlook for Chinese oil demand unless additional stimulus measure will be launched from Beijing. In our view, the weak manufacturing reading strengthened their expectations that additional stimulus measures will be launched shortly, which include at least one rate cut and approval of more infrastructure investments.

The oil market is eagerly awaiting the conclusions from the report by the International Atomic Energy Agency (IAEA) after talks between senior IAEA officials and Iranian delegates in Vienna 24 August. The talks tried to clarify the Agency’s concerns regarding Iran’s nuclear programme, focusing on its possible military dimension. According to the IAEA: “The discussions today were intensive, but important differences remain between Iran and the Agency that prevented agreement …” The lack of progress in the talks between the IAEA, the West and Iran has pushed up the political risk premium and thereby oil prices since the last meeting in Q2.

In addition to Friday’s employment report from the US, all eyes will be on the ECB meeting Thursday. Expectations are high and the ECB will probably only deliver partly in the sense that details will remain scarce. We expect the market will be slightly disappointed and risk appetite may see some pressure. This could ease the strong upward pressure on oil prices this week if no news reach the headlines on the political oil arena.

Today is Labor Holiday in the US and markets will be closed.

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