The oil pressure is rising. The bulls and bears get ready for another showdown as the market looks ahead to mid month expirations and the upcoming OPEC meeting.
The oil bull controlled the market last week but the bears are trying to mount a comeback. Oil prices are pulling back a bit after last week’s impressive run as the bulls are looking for the slightest excuse to break out and run this market higher. This pull pack is leading many to wonder whether or not this pull back is a buying opportunity or a potential top.
Those just focused on supply will tell you that oil just has to be at a top. They have some impressive arguments to make. For example, the fact that crude oil supplies hover at the highest level since 1990 or that forward crude cover is at 61 days well above the five-year average of 52 days. They will point to anemic demand and the dismal outlook for the summer driving season as unemployment rate is at the highest level in 25 years.
Yet at the same time the oil market has shown that it wants to ignore these well known and unsurprising facts. If oil were to fall every time we saw supply rise due to weak demand, this market would be substantially lower. Oil is not reacting to this because of the historic shocks and changes to the global economy. This is a market that is being used not only as a gauge of supply and demand but also as a financial instrument. Oil moves inversely with the dollar or along with the stock market. It is a market that is being used as a hedge against systemic risk and as a hedge against inflation. It is a market that is looking ahead to a rebounding economy. It sees the fund flows back into the BRIC countries. It is a market that is impressed with OPEC compliance and plunging rig counts and falling production. Oil is acting truly as a futures market focused on the future ignoring the fundamentals of the present. It is a market that believes that the Fed’s move to quantitative easing as very bullish to oil. The day before the Fed announcement towards quantitative easing oil closed at 4735. The day of the meeting oil rebounded from a low of 4653 to close at 4916. Then it did do a two day spike down to $43 level on the expiration of the May contract but the actively traded June contract immediately brought oil back to the $47 a barrel handle. The inflationary and simulative impact of the Fed action is apparent. Yet it is also the global amount of spending and stimulus that has led to oil supply defying rally. Oil is in a new world of its own and you cannot underestimate its potential to make moves that may seem to defy what the bears see as rational explanation.
We feel that a good break would be nice but would view it as a buying opportunity as funds are seeking places to go. Oil should continue to benefit from current central bank inspired stimulus as money seeks safe harbor.
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 .
