The Nikkei snapped a three day winning streak with a sharp drop of -6.8% on Wednesday. Comments from nearly every European country about slowing growth as well as turmoil in the currency markets combined to push the Asian markets lower.
Only one day after China reported their GDP was 9.5% and well above levels most analysts were expecting, the markets fall back into an earnings nightmare and all the positive news was quickly forgotten. Volume was light but trading patterns suggest mutual funds were still in liquidation mode. The strength in the yen was unwinding what few yen carry trades still existed after more than a month of panic covering. Toyota Motor lost -6.9% after warning that sales were going to decline by -2% over the prior year. That is the first decline in over a decade.
The turmoil in the Asian markets pushed crude prices below $69 intraday as the December futures contract became the front month on Wednesday. The November contract expired on Thursday at $70.89. Expiration pressure knocked -$4 off the November contract just before the close.
Another build was expected in U.S. crude inventories when the EIA report is released on Wednesday. Nobody seems to care that OPEC is making noises about a three million barrel per day production cut then they meet on Friday. Everyone believes it is just talk and OPEC does not have the clout to make its members actually take that much production offline.
With an additional 4 million barrels per day of new production coming online over the next 14 months it is imperative that OPEC get control. If they don't hold the price here in the $70 range over the next couple months they could be defending $50 very quickly. The drop in global demand has been huge even if it is only temporary. Some analysts feel the U.S. has seen demand decline by -5% over the last three months. If the rest of the world catches the U.S. financial flu that could mean a drop in demand of four million barrels per day. While I personally believe that cheap oil will rekindle demand almost instantly it remains to be seen if that demand will return soon enough to ward off the coming glut in 2009. After 2009 passes we will be wishing for the glut to return because there is hardly any oil coming to market over the next decade.