Oil turns bullish on supply and election

“Virtue does not come from wealth, but...wealth and every other good thing which men have... comes from virtue.”

Socrates

EMI QuickView Short Term Market Overview

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Event one came in as expected with the Republican party capturing the US House and making solid gains in both the Senate and governorships across the country. The American public clearly sent a message of no more politics as usual in Washington DC. The American people want a new direction as the current Administration policies have not produced jobs nor has it put the economy in a solid recovery. The vote clearly was a rebuke of big government, big spending and big bailouts as the US economy continues to face a very sluggish recovery and growing deficits. As much of yesterday’s historic election results (more House seats moved to the Republican side ...about 65 seats ... or the largest party turnover in over 70 years) were expected and priced into the market the actual results were directionally better than many of the polls indicated and should prevent much of a sell the fact day on Wall Street. The big question facing the US will be can a change in the mix in Washington DC be enough to get the economy moving in the right direction? Most analysts on Wall Street think it will certainly be enough to slow down or even stop the unpopular legislation that has occurred over the last two years and even possibly result in the repeal of the very unpopular and costly health care bill. As such the market has been viewing a takeover by the Republicans in the House as a positive for markets as less government intervention into the business mix is likely to be one of the main results going forward. Even a sort of gridlock has been viewed favorably as no new costly legislation is likely to emerge over the next several years.

In addition the next major event of the week hits the media airwaves at 2:15 PM EST today when the results of the US Fed FOMC meeting is announced. The market has priced in a new round of quantitative easing of around $500 billion dollars spread over a period of time (months). The Fed is likely to leave QE2 open ended with no definitive cap at this time other than it will continue as long as the economy requires it to continue. With the new mix in Washington DC the likelihood of any new fiscal stimulus program is highly unlikely and as such the only stimulus program that will emerge in the US will be QE2. Whether or not it jump starts the economy or just creates more inflation risk is a whole another discussion but for today it is likely to become a fact.

So far the global equity markets have viewed the US mid-term election results positively as the EMI Global Equity Index has continued to add value over the last twenty four hours as shown in the following table. The Index is now higher by 1.6% for the week resulting in a widening of the 2010 year to date gain to 4.2% or the largest gain for the year so far. Most of the Asian markets gained ground today with only China’s Shanghai A shares receding modestly on the day. With two more major events yet to hit the media airwaves this week’s equity trading has been cautious with a significant amount of cash still sitting on the sidelines looking for a window of opportunity to reenter the equity markets. I think it will once the sell the fact possibility is clearly behind the market. Most interestingly we have not seen any equity selling now that the US election is a known fact. At the moment the global equity markets are supportive for oil and the broader commodity complex which is consistent with the view coming from the currency markets as the US dollar remains marginally lower ahead of the Fed announcement this afternoon..

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