Morning Petrospective – August 30, 2010       

il prices were higher again on Friday, in a renewed frenzy of risk appetite, as Fed Chairman Ben Bernanke gave investors the signal they had been looking for. Speaking from Jackson Hole, Wyoming, he essentially told investors that the Fed will step in if the economic recovery appears to be in serious trouble. As a result of his comments, traders and investors dumped the US dollar, which is considered a “safe haven,” and they bought equities and commodities, including oil. The fact that prices were still oversold and near support certainly did not hurt. Traders saw buying oil as a low-risk purchase, and then the Fed seemed to guarantee it.

It was the third day of higher oil prices, and it was the third day lower in the euro. This is hardly a coincidence. The oil complex has been following the euro, equities or economic data for the better part of four months, now, since early May. When those elements are weak, the fundamentals in the oil market are given a chance to shine through to press quotes lower - especially when prices are high or near the upper reaches of a trading range. We were in the middle of one of those fundamentally-inspired declines when we started this week. And, it looked like prices might be able to challenge the major support levels at $69.60 and below that at $64.24.

The problem was, though, once prices got oversold and near $70 in crude oil, traders started to lose interest in holding their short positions. When the dollar, which had been advancing, suddenly declined, it was enough to generate short-covering by fundamental oil traders and also brought back the investors who love to buy oil contracts as an asset class. Theoretically, oil prices should rise when a weaker dollar makes oil prices (denominated in US dollars) less expensive in other currencies. Stronger equities help oil prices because they suggest a stronger economy and increased oil demand.

The DJIA broke down below 10,000 briefly this week, but they ended the week up 164.84 to 10,150.65. Next week, a few things are clear, from this week. The first is that the oil market fundamentals are not really likely to gain much traction if prices are under $75 to $77 a barrel. The second is that investors are alive and well and will be buying oil if the euro or if equities rally. And, even if we seem to have everything lined up on the bearish side, as we did earlier this week, with the dollar resurgent, equities under selling pressure and the fundamentals as weak as they have been, oil prices are unlikely to fall below $70-$71 a barrel. And, apparently, all it will take is just one wayward report showing that there is still some lingering hope for an economic recovery to bring buyers (investors) back in.

The oil complex is still in shackles, chained to markets that never really meant all that much to oil traders for 25 years. In many ways, oil prices are less the reflection of oil supply and demand than they are mere surrogates for equities or the euro. We still feel that zero-interest rates are part of this equation. Maybe, once we get enough of a recovery for interest rates to rise, the oil markets will be unfettered again, free to reflect fundamentals. In the meantime, investors still control oil – as an asset class rather than as a commodity.

     FMX Newswire       

FMX Newswire is an overnight news summary designed to meet the needs of professional energy traders. The content is to-the point, professional grade and not widely reported in the mainstream media. All sources are professional respected firms and newspapers.

Platts oil

• Malaysia has finally awarded the Sabah Oil and Gas Terminal contract. The lucky winner is Samsung. SOGT will be ready by Dec 2013.
• PM Putin Sunday launched the Russian section of the new ESPO pipeline running from Skovorodino to China's Daqing.
• PetroChina is planning to invest $44 mil to build an LNG facility to supply Tibet's capital Lhasa.

Bentek Energy

• Power Burn Analytic Report - U.S. Power Burn Up as Temperatures Rise Over Weekend
• Gulf Coast Production Analytic Report - Strengthening Earl May Reach U.S. Coast
• Texas Observer - Implied Storage Injections to Remain Strong
• Supply/Demand Balance Analytic Report - Injections to be Suppressed This Week As Demand Increases

Bloomberg 

• Crude Falls From Seven-Day High on Skepticism About U.S. Economic Recovery
• Natural Gas Bear Bets at Year High Point to Price Bottom
• Hurricane Warning Issued as Earl Approaches U.S., British Virgin Islands
• Gulf Navigation Seeks to Acquire Oil Tankers as Economy Recovers, CEO Says
• Russia Will Boost Oil Exports to China With New Pipeline From East Siberia
• BP Said to Fault Own Engineers for Misinterpreting Well Data

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