Monday, June 28, 2010

Phil Flynn: Dodge A Bullet

Tropical storm Alex most likely won’t be much of a problem for BP as its track is far south of the spill zone. Now let’s just hope that another storm does not develop. A second tropical wave dissipated and that is good news as it appears that BP may have dodged a bullet and can continue to collect oil and make progress on moving forward with the relief well.

The Wall Street Journal reports that BP said it recovered 22,750 barrels of oil on Saturday yet at the same time they do not expect to complete the relief well until early August. The question is will it work. The Financial Times says that the operation has no precedent at the depth that BP is operating, but a review of similar efforts in shallower waters and the opinion of geologists and petroleum engineers point to a discomforting possibility: the relief well might not work on the first try, leaving open the risk of delays. Delays that could turn out to be worst as hot air in the Atlantic could produce more storms.

Speaking of hot air, the G-20 met over the weekend and the world’s 20 most wealthy nations and their commitment to debt reduction and banking reform may have more influence over oil than the weather. The G-20 said that they plan to follow through on fiscal stimulus and communicating “growth friendly” fiscal consolidation plans for advanced countries that will be implemented going forward. The G-20 says that sound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges of aging populations, and avoid leaving future generations with a legacy of deficits and debt. The path of adjustment must be carefully calibrated to sustain the recovery in private demand.

They will commit to reducing debt. The G-20 said that there is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery. There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth. Reflecting this balance, advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016. For the crude oil market the impact from the G-20 is apparent.

It will have as much impact on oil as it does on the euro and the dollar. Oil broke when the dollar broke and the euro rallied leaving it clear today where oil will take its marching orders from. Watch the currencies for the oil direction. And since the currency action will probably be light, it should be a good day to buy the breaks and sell the rallies.

Phil can be reached @ and make sure to catch him every day on the Fox Business Network

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