Oil positioning ahead of FOMC and election

“Honesty is the first chapter of the book of wisdom.”

Thomas Jefferson

EMI QuickView Short Term Market Overview

Impact on Energy Prices

Price Drivers

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Gasoline

HO/Diesel

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US Dollar

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Global Equities

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10 Yr Treasuries

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Geopolitics

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Technicals

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Market Sentiment

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Overall View

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

CBr - Cautiously Bearish

As I have been suggesting, the market is continuing to position itself ahead of next week’s two main events… the U.S. Fed FOMC meeting and the U.S. mid-term elections. The result is a modest round of dollar short covering which has resulted in oil and most other commodity prices weakening overnight and into this morning’s opening. Further adding to oil price pressure overnight is the significantly larger than expected crude oil build reported by the API last evening coupled with what looks like the beginning of the end of the French oil workers strike as about a quarter of the refinery workers agreed to go back to work yesterday. Although the market generally does not embrace the API data all that much, yesterday’s 6.4 million barrels build on top of non-supportive financial markets was enough to push oil investor/traders in Asia to focus on oil fundamentals which are still well supplied.

The U.S. dollar Index has been firm throughout the overnight trading period with the dollar/euro switch currently trading at a one week high as dollar short covering permeates throughout all of the currency markets. As I have been discussing for weeks, the direction of the U.S. dollar is almost entirely being driven by what the next round of quantitative easing will look like when the much expected announcement is made by the U.S. Federal Reserve FOMC committee next week. This morning’s move by the U.S. Dollar Index is far from a significant move to the upside as it is currently up by only 0.1% (as of this writing) strongly suggesting that what has occurred in dollar trading is all short covering and not yet the beginning of a definitive value reversal to the upside. Heading into U.S. trading, the dollar is mostly neutral to bearish for oil and the broader commodity complex at the moment.

On the global equity front the EMI Global Equity Index has held its ground over the last 24 hours as shown in the following table. The Index is still higher by 0.6% for the week resulting in a widening of the 2010 year to date gains to 2.9%. Most of the Asian markets lost ground today even after a marginally positive close in the U.S. on Tuesday. The view floating around Asia is next week’s expected Fed announcement may disappoint the market in that the magnitude of QE2 may be smaller than most investor/traders have been anticipating. As I said yesterday book squaring is already underway ahead of next week’s events. That said, trading in equities in Europe have been mixed so far with a better than expected earnings report coming from Germany’s biggest bank…Deutsche Bank. In addition U.S. equity Index futures are in negative territory suggesting a lower opening on Wall Street this morning. At the moment, the global equity markets are neutral to bearish for oil and the broader commodity complex which is consistent with the view coming from the currency markets.

EMI Global Equity Index

10/27/10

Change

Change

2010 YTD

2010

From

From

Change

6:57 AM

Yesterday

Yesterday %

%

US/Dow Jones

11,169

5

0.05%

7.1%

Can/S&P-TSX

12,685

21

0.17%

8.0%

Lon/FTSE

5,677

(31)

-0.54%

4.9%

Paris/Cac 40

3,858

5

0.13%

-2.0%

Germany/Dax

6,613

(1)

-0.02%

11.0%

Japan/Nikkei

9,387

10

0.11%

-11.0%

HongKong/HangSeng

23,165

(437)

-1.85%

5.9%

Aussie/SYDI

4,648

(40)

-0.85%

-4.8%

China/Shanghai A

3,140

(47)

-1.47%

-8.7%

Brazil/Bvspa

70,740

1,160

1.67%

3.1%

EMI Global Equity Index

15,108

65

0.43%

2.9%

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