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DB: Markets are between recessions

Sam Fletcher
OGJ Senior Writer

The recession appears to have ended in June, “although not officially declared yet,” said analysts with Deutsche Bank AG, London. But before rejoicing spreads throughout the world economy, the bank’s analysts warn another recession is coming in just 3 years, making the period in between “one of the shortest economic expansions in the last 55 years.”

Deutsche Bank analysts explained, “Historically, the beginning of the end for US gross domestic product growth comes as soon as the Federal Reserve starts to embark on a new monetary tightening cycle. Over the past 50 years the duration of every US expansion has been directly proportional to the amount of time the Fed provides monetary stimulus to the economy.”

For example, they said, “When we first presented this analysis in January 2005, we stated the next US recession would begin in December 2007. This reflected the fact that the US left recession in November 2001, but it was not until June 2004, 32 months later, that the Fed started to raise interest rates. Based on the historical correlation, a prime rate lag of 32 months would imply an economic expansion of 72 months.”

Bank officials said, “Since our US economics team expects the Fed to embark on a new monetary tightening cycle in August 2010, and if we assume the US recession ended in June 2009, then it would imply a prime rate lag of 14 months.” Based on the historical correlation this would imply “an economic expansion of just 40 months,” with another recession starting in November 2012.

Volatile prices
Meanwhile, Deutsche Bank analysts said, “We believe the next decade may herald a significantly more volatile macroeconomic environment than we have seen in the past. However, given the significant provision of liquidity by the US Fed, concerns over a double-dip next year are probably misplaced.”

They said, “For the time being we remain optimistic that US GDP growth will continue to surprise to the upside. However, our concerns have focused on the risks that with a weak housing sector and labor market, the US economy may be challenged when the benefits of the fiscal stimulus start to fade.” They expect the fiscal stimulus to “work against growth” in 2011.

“This may not cause the US difficulties given the provision of unlimited central bank liquidity by the Fed,” analysts said. “In fact we believe central banks have created the conditions for another minibubble to form in financial asset prices heading into next year.”

Global oil demand began to improve in the second quarter but is still running at a slightly negative rate on a year-over-year in the current quarter. “We expect this situation to improve dramatically in the first quarter [of 2010] with oil demand up at least 1 million b/d and possibly as much as 1.5 million b/d,” said Deutsche Bank analysts. The remaining quarters of 2010 should show relatively steady improvement “of about the same absolute amount,” they said.

Inventory imbalance
Meanwhile, imbalances in the US oil market have been sorting themselves out “very slowly indeed,” said Paul Horsnell, managing director and head of commodities research at Barclays Capital in London.

A key part of that adjustment is the “winnowing away” of the crude overhang. “Producers have had to constrain supplies enough so that reductions in refinery runs have been covered by lower imports in such a way as not to further bloat inventories,” he reported the first week of November.

Horsnell said, “However, beyond that reduction, an even greater degree of import compression has been needed to get the overhang to fall simultaneously with lower runs. In the latest data release [for the week ended Oct. 30], the US crude overhang (i.e., the amount of inventory above 5-year average levels) fell to 21.5 million bbl, the lowest this year.”

Horsnell noted, “The crude overhang peaked at the end of April at close to 50 million bbl, had shown signs of ballooning out again in August, but has been brought back into line more sharply in recent weeks. Since the peak was reached, the reduction in US crude oil inventories relative to the 5-year average has averaged 150,000 b/d. That is not a very fast rate of overall improvement, but having been sustained over more than 6 months the cumulative effect has now become significant.”

In terms of international demand, he said, “Gasoline and North America remain strong, while Europe and diesel remain weak.” Middle East demand is surging, with Saudi Arabian demand “a very strong dynamic.”

(Online Nov. 9, 2009; author’s e-mail:

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