Fed policies grab oil bulls by horns

What a way to end a month and end a quarter! Oil prices as calculated by Reuter's News finished up 3 percent for the quarter and up 12% in September for the biggest monthly gain in 16 months. And let's face it, most of that gain came in the last couple of days. Just another reminder to never fight the Fed. Their promise to provide additional accommodation if needed to support the economic recovery and to return some inflation has over time helped create the environment for the breakout back above $80 a barrel. The day the Fed made that statement back on September 21, oil hit a low of approximately 7281 in the lead contract, a level that has not been seen since. And despite some lower on the day closes oil has averaged up ever since.

Obviously as we ended the month and the quarter the combination of strong data out of China and a drawdown in US inventories and some goldilocks US economic data on the Durable Goods, Chicago Purchasing Managers and Weekly Jobless Claims created a short covering buying mania. Adding more fuel to that fire is China's Purchasing Manufacturer's Index flying to a more than expected to 53.8% in September, up 2.1% points from August. Of course there are those out there that are rolling out even more bullish argument and touting the bullish side of the story.

Goldman Sachs once again is calling for oil to average $100 a barrel next year. Goldman, frustrated last year with their bullish call, now says that oil is undervalued and will soar as the global economy rebounds and the current over supply of oil tightens. Sound familiar? These bullish predictions are based in part on predictions of a 4.3 percent growth rate predicted from the International Monetary Fund. Others believe growth in China, India and Brazil will tighten supply and create supply tightness. That is even without the 100 billion dollars of stimulus that the Chinese pumped into the economy last year.

These are the same arguments that we have heard going into this year and the fact is it never materialized to the extent that impacted oil over supply. In fact the bulls predictions of $100 a barrel plus oil as we began 2010 at 8151 never quite happened as oil prices surge to get back to even where we stated the year. Yet whether or not you buy into the bullish demand side of the argument, the bulls have the Fed on their side and Fed with their magic printing press is impossible to fight. And wouldn't you rather switch then fight?
About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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