Tuesday, December 20, 2011

Phil Flynn: The Hopes and Fears!

The Hopes and fears of oil traders are met in the Euro Zone tonight! There is nothing like a good Spanish bond auction and a strong German consumer confidence number to get our minds off Mario Draghi. German confidence unexpectedly gained and Spain sold 7.4 billion dollars in T-bills in a successful bond auction with a reasonable yield of 1.735% on the three-month T-bills, down from 5.11% at the previous sale on Nov. 22, and it paid an average yield of 2.435%, down from 5.227%.

It is all about hopes and fears and that has been the dominate force driving oil this year and in recent days. The hopes that the Euro zone would step up to the table with a big bazooka to put the Euro break up fears to rest were dashed. Mario Draghi is a drag and is making it clear that a Euro bond is highly unlikely. Yet the German consumer confidence is showing that Europe might be more resilient than thought and downgrade fears might not be coming as fast and furious as previously thought .Dow Jones reports that Fitch Ratings says the 'AAA' rating on debt issues of the European Financial Stability Facility (EFSF) largely depends on France and Germany retaining their 'AAA' status.

The revision of the rating outlook on France to negative last Friday implies that the risk of a downgrade of EFSF debt has increased. We affirmed France's 'AAA' status but warned that that there is a slightly greater than 50% chance of a downgrade within the next year or two. This is therefore also the case for the 'AAA' ratings assigned to the EFSF's debt issues, unless additional credit enhancement mechanisms are introduced. The 'AAA' ratings assigned to EFSF debt issues rely on the EUR726bn of irrevocable and unconditional guarantees provided by the euro member states, and on the conservative guidelines the EFSF sets itself regarding debt management and liquidity risk.

Of the guarantees and over guarantees from 'AAA' rated member states, France and Germany provide EUR369.6bn, or over 80%. Although the EFSF could potentially remedy a downgrade of a small 'AAA' guarantor by increasing the size of its cash reserve or through additional credit enhancements, this would be far more challenging if a larger guarantor like France or Germany were downgraded. The primary source of ratings risk for EFSF debt issues is therefore the possibility that one or more of its largest 'AAA' guarantors is downgraded.

Oil may be also getting a boost from the Dow Jones report that, “Saudi King Abdullah is urging neighboring states to join in a formal Gulf union to confront what he called rising threats to their security and stability, as Gulf leaders convened to discuss regional uprisings and growing Arab worries over Iran. You must realize that our security and stability are threatened and we need to live up to our responsibilities," King Abdullah told the leaders of the five other nations of the Gulf Cooperation Council, gathered in Riyadh in their first annual GCC meeting since the Arab uprisings began. "

The Gulf's monarchies, emirates and sheikhdoms risked losing all if they failed to combine their efforts, Abdullah said. "So I ask you to go beyond the stage of cooperation, to a union in a single entity. King Abdullah gave no immediate public details of how he envisioned such a union taking shape, or operating. Gulf officials had said earlier that the two day meeting launched Monday would address greater cooperation in the military realm and others. The GCC comprises Saudi Arabia, Kuwait, Qatar, the United Arab Emirates, Oman and Bahrain.” Stay tuned.


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