Ugly Europe

Whilst we are all buried in trying to find out the results of the next bono or btp auctions, perhaps it is timely to point out how the demand side of europe is doing at this point in time. As GDP, retail sales, IFO etc are good indicators, i suspect it would be helpful to a few macro punters to look at a more timely indicator of demand/supply as indicated by the structure of oil for example. Even though oil prices are sticky at the moment, in particular with the Iranian reutoric in recent days, it is interesting to note that we are experiencing a severe drop in demand in Europe. The numbers are not available as yet but the term structure give us a hint. European (ICE) Gas oil, futures curve has gone into contango for the second month in a row. This typically signals a fall in demand relative to supply and is taking place in spite of potential supply cut resulting from the closure of some petroplus refineries.

ICE Gasoil front spread

Similarly in the crude oil market, Brent's structure is weakening repidly, with the last contract expiring in contango. As Brent is primarily still a European based contract, this is a telling sign that refineries are taking less crude into their system and that end user demand in finished products like Heating oil is falling hard in europe. This isn't helped by a fairly mild winter so far and is a lagged effect of the very high price of oil in EUR terms. The likes of Greece and Italy must be feeling the pain even more now. Perhaps i am jumping too far ahead but January economic numbers in Europe could be bad. European sanctions on Iran might be good for the long run politically but Brent is only above $110 now for one reason. In any scenario of Iran easing off, oil price could finally come off and give Europe a small helping hand. I'd like to point out though that this weakness is a pure European phenomenon as Asian/US related oil product structures are still highly backwardated and demand is strong.

Brent crude front spreads

Brent crude in EUR