Oil turns bullish on dollar and equity support

“You cannot escape the responsibility of tomorrow by evading it today.”

Abraham Lincoln

EMI QuickView Short Term Market Overview

Impact on Energy Prices

Price Drivers

Crude

Gasoline

HO/Diesel

Nat Gas

Supply

N

N

N

CBr

Demand

N

N

N

CBr

Inventories

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N

N

CBr

US Dollar

CBu

CBu

CBu

CBu

Global Equities

CBu

CBu

CBu

CBu

10 Yr Treasuries

N

N

N

N

Geopolitics

CBu

CBu

CBu

CBu

Technicals

CBu

CBu

CBu

CBr

Market Sentiment

CBu

CBu

CBu

CBr

Overall View

N

N

N

CBr

Bias

CBu

CBu

CBu

CBr

N - Neutral Bu - Bullish Br- Bearish CBu - Cautiously Bullish

CBr - Cautiously Bearish

Oil prices are hovering in negative territory in overnight trading even as global equities are continuing to firm and the US dollar is trading either side of unchanged. Last night’s API oil inventory report was bearish for crude oil but bullish for gasoline and supportive for distillate fuel (see more details below). The combination of the unreliability of the API data and the fact that the financials have been the primary driver of oil and other commodity prices has negated any overreaction to last night’s API inventory report as the market awaits this morning more widely followed EIA report. Although oil prices are toppy based on current fundamentals market participants are more focused on the perception trade or what the fundamentals might be down the road. Many analysts are starting to project a more balanced supply and demand profile as we move into 2011 as demand from the emerging world continues to grow (especially China) while the developed world remains mostly flat. Next week we will get the EIA, IEA and OPEC updates of their monthly long term forecasts.

Oil prices have increased by almost 14% since bottoming around the middle of September...mostly based on the weakness of the US dollar and the firming equity markets. As shown in the following chart of the spot Nymex WTI contract versus the US dollar index and the S&P 500 equity index the correlations remain very high with no sign of any decoupling at this phase of the trend. The market is starting to buy into the scenario that irrespective of where the economy heads from here, it is likely to be supportive for oil and the broader commodity complex. If the pace of the global economic recovery picks up in both the developed and emerging world demand for oil will increase and accelerate the return to a more normal historical supply, demand and inventory relationship which would be a supportive scenario for prices. If the economic recovery stalls or just moves very slowly (as of the moment) we can expect more quantitative easing coming from the US (we already saw it in Japan this week) which would not only help to put a floor on the recovery but would result in the US dollar remaining under pressure increasing the risk of inflation which in turn would be supportive for oil prices. At the moment the market is looking at both scenarios and feeling more and more comfortable about being long oil and pretty much most any traditional commodity, including gold. The risk asset trade is back in the forefront.

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