The latest economic data from the US is fairly troubling for commodity producers in the Middle East.
Retail sales data for May along with producer price data all point to falling demand for petrol from the US consumer. After the very weak labour market report for May a decline in retail sales was to be expected. However, we are moving into what is known in the US as “driving season”, when people get in their cars and drive to other states for summer holidays. This tends to boost petrol demand during the summer months.
However, the latest economic data suggests that this year demand may not be as strong. A good gauge of demand is the Fourth of July holiday, so everyone will be watching retail sales data and US oil consumption data closely in the coming weeks and months to see if the weak payrolls report for May predicts a summer slowdown for the US economy.
Combined with weak US data, the Eurozone sovereign debt crisis continues to dominate market sentiment and the oil price is looking vulnerable from a technical perspective. WTI is threatening to beach $80 per barrel, a significant support zone. Below here opens the way to $76.00 and potentially $60 if the situation in Europe deteriorates further.
There are a couple of fundamental events that will be pivotal for commodities this month: 1, the outcome of the Greek election. If Greece elects a pro-austerity government on 17th June then we could see a sharp relief rally that would most likely help boost commodity prices, however if they elect an anti-austerity party we could see a sell-off in risk, which would threaten deeper declines in the oil price. One June 20th we get the next FOMC meeting. If there are any hints from the Fed that it is considering adding more stimuli to the economy then we would expect commodities and other risky assets to rally sharply and for the dollar to decline. Right now the risks are balanced for, but the next two weeks are pivotal for the long-term direction of commodity prices.
(Kathleen Brooks is Europe, Middle East and Africa Research Director at FOREX.com)