If the fundamentals on oil are so bearish then why did oil close at a new high for the year? Oil bears be on guard as the fundamentals in the oil market are transcending traditional measures of supply and demand.
Oil is making a statement and that statement could be punctuated with a new worry on the geopolitical front. Reports of a military coup in Georgia could pop the top on this simmering caldron. If we take out the highs for the year, stops could be hit sending oil in a higher trading range and possibly signaling a move towards $70 a barrel. Oil prices tried to retreat from the highs yet seem to be moving back up on renewed worries about the Georgia Republic. Reuter’s news is reporting that the Georgian government was saying that a "military coup," was underway. The Interior Ministry of Georgia said that a plot to overthrow the Georgian government had been uncovered, and said people involved had received money from Russia. Now the Georgian government says that things are under control yet we will continue to watch the situation as it develops.
Yet even without the geopolitical news, the action in the oil market has been impressive. Yesterday oil prices surged on a triple dose of better than expected economic news. Oil climbed despite the expectation for more increases in supplies. Oil bears are stunned and believe that the market is defying rational explanation. Still oil failed to breakout over the high and this gives the bears hope that their long nightmare is over.
There is a rational explanation for the move, yet the bears continue to ignore it. Maybe it as simple as the fact that oil has more dollar value in a world where the U.S. government is running up a debt of historic proportions. The dollar is under pressure and at the same time the Fed has instituted a policy of quantitative easing that has kept a floor under crude since they made that fateful decision last March. Plus we see signs that China’s manufacturing sector is once again expanding for the first time in eight months.
China, the main drive of commodity demand, is showing sign that demand will grow. And it is not just oil that is betting on a China rebound. We have seen some major moves in the soft commodities. Cotton is one market that has put in an impressive rebound mainly on expectations of a rebound in the Chinese economy. The International Cotton Advisory Committee said that world cotton trade is forecast to recover in 2009-10, led by China and India, though production is expected to exceed mill use and raise ending stocks. The CAC said an expected increase in China's imports to 1.7 million tons could significantly contribute to the rebound. India is expected to account for most of the projected export rise with shipments forecast to more than double to 1.2 million tons, ICAC said in the release.
In the backdrop I am still hearing new rumors daily about Israel planning an attack on Iran’s nuclear facilities. There may be nothing to it but a day does not go by when I don’t hear of some speculation in that direction. The question is whether or not the market is buying into it.
On the supply side all we here is that there is a glut of oil. Last week Bloomberg news reported that in Rotterdam, Europe’s largest port, they may be running out of space to store crude. This week the market expects another increase in U.S. supply already at an 18 and a half year high. Still oil is focused on other things for the moment.
Phil Flynn is vice president of Alaron Trading and a Fox Business Network contributor. He can be reached at (800) 935-6487 or pflynn@alaron.com .
