Morning Petrospective – July 18, 2011
he oil complex was higher on Friday as traders tried to parse the differing testimony from Federal Reserve Board Chairman Ben Bernanke this week. He said that quantitative easing would be available as a policy tool … but then qualified that by saying that it will be deployed only f there are signs of deflation. So, on Wednesday, prices jumped when he introduced the possibility of launching another round of quantitative easing. But, on Thursday, prices sold off on the qualification. Then, on Friday, traders tried to bridge the differences, and they came to the conclusion it is bullish.
The bottom line is that QE3 is alive as a possibility, whereas a week earlier it had been put to bed as a policy tool. Despite Mr Bernanke’s qualification, oil traders are really left with a world in which supportive economic news is bullish for oil prices … but so are negative economic data. It may just take a larger accumulation of poor data to bring the Fed into the market (with QE3) than it has before, but bad economic data brings us one step nearer to QE3. And that makes it bullish. The end result is that everything, every piece of economic data is bullish.
The US dollar is likely to come under pressure from the Fed’s policy as well. Low existing interest rates were an ongoing bearish factor, but the possibility of there being a third round of quantitative easing has dollar bulls ready to throw up their hands in dismay. Just the possibility of another round is enough to scare away any buyers.
A weak dollar has been one of the ongoing factors behind a strong oil complex and, unless the buyers are able to build on what had looked like an early bottom in the greenback, we have to expect that dimension to return at some point, soon. It is through a weak dollar that QE2 made itself felt most strongly in oil markets. As a result, traders now see the potential of there being a QE3 as bullish for oil on its own. The dollar still looks like it has made a bottom against the euro, but we need to watch it carefully for signs that it wants to make new lows at some point.
The third leg of this market stool is the stock market. It peaked, along with the euro and oil prices, in late April/early May. It has been on the same schedule that oil prices have been on this week, and the DJIA was up 42.61 to 12,479.73 on Friday. All that really tells us is that equities traders came to many of the same conclusions at the same time as oil traders did.
And then there is gold. On many days we are convinced that there are some very well-heeled traders who are thinking of oil in terms of gold. If it was worth a tenth of an ounce in 2001, why shouldn’t it be $150 a barrel now? Gold made new all-time high settlements on Friday. What is bullish for gold, in many respects, could be seen as being bullish for oil.
Longer-term, we are bullish on oil. At some point, there will be much greater demand than available supply. But, our long-term bullish scenario in oil is largely predicated on a full-fledged global economic recovery. And the problem is, we have never had an economic recovery with crude oil prices at more than $30. It has been a struggle even over $20. At $100 a barrel, we do not see how we can have a strong economic recovery in much of the world. And that makes demand unlikely to reach its potential. In other words, and it sounds wrong: Oil prices are too high for a real bull market to get under way. That might turn out to be our saving grace, in the final analysis, because it looks like prices want to move higher.
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.
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