Morning Petrospective – May 24, 2011
he oil complex was lower on Monday, led down by extremely weak heating oil quotes. Crude oil prices were also well lower, but gasoline prices withstood the selling and were steady to slightly higher on the day. The DJIA was down 130.78 to 12,381.26, and it set the tone for the weak session. And the euro was hammered, with the US dollar gaining against it and some other currencies. The weaker stock market and euro were enough to press oil quotes lower on the day. European sovereign debt was at the center of concerns on Monday.
Standard & Poor’s downgraded Italian debt and Fitch’s downgraded Greek debt, and those revisions brought in a fresh set of worries over the European sovereign debt crisis. On top of that, the European Central Bank (ECB) seems to lean towards raising rates, but does not dare here. And the people in countries with austerity plans have been demonstrating, sometimes violently, scaring bankers who feel that austerity might not survive elections.
The HSBC China Manufacturing Purchasing Managers Index, a gauge of Chinese manufacturing activity nationwide, fell to a 10-month low of 51.1 in May from a final reading of 51.8 in April. That was also exacerbated by the trend of China’s Central Bank to focus on fighting inflation, first. Everywhere traders looked, except the US, economies were weakening and central banks were tightening, expected to tighten or leaning in that direction. It was not a day supporting risk.
The US dollar started rallying right off the bat on Sunday evening and it kept advancing until about 5 AM Monday morning. It eased from there through the rest of the trading session, but it did not ever really weaken all that dramatically. The selloff looked like light profit-taking. Longer-term, the dollar looks like it has built a significant bottom, even if it ultimately will need to test its recent lows.
The oil complex advanced from its lows in December, 2008, through 2009 and 2010, and into early 2011 on a weaker dollar/stronger euro, stronger stock market and the sense that the economy was improving. Now, those factors are all unraveling. The dollar seems to have bottomed, at least over the immediate term. Equities are having trouble breaking to new highs and are experiencing long liquidation (selling). And the economy has lost most of its bounce and almost all of its momentum. The reasons to buy oil as an asset class seem to have evaporated.
Inventories are better than they were in September, when the last bullish market was boosted by a second-stage rocket called QE2. Logically, the same reasons that led the Fed to QE2 should now lead the Fed to a QE3. But, the political resistance to such a course of action is very heavy, both within the Fed from a healthy faction, albeit still seemingly a minority, and from within Congress and in the greater population under the banner of the Tea Party. Another round of quantitative easing seems to us to be a logical destination based on the factors existing in the markets. But, the Fed will need to turn more than a hundred degrees to get back on that course. It is not 180°, but it could be 100° or 120° from where the body was after its last meeting. And it looks to us like it would take two months of preparing the market before the Fed would be able to push for QE3. Without it, prices look awfully heavy and high here.
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