Following the Fed’s initiating a second round of quantitative easing (QE2), crude oil has broken out to the upside.
Phil Flynn, senior energy analyst at PFGBest, says a combination of strong Chinese demand and the actions of the U.S. Fed have been the major movers for oil. “The bottom line was the Fed wanted inflation when they introduced quantitative easing, and, at least in the oil market, they got it. The Fed really has been the ‘winds beneath wings’ of the oil industry,” says Flynn. Going forward, he warns investors to keep a close eye on China. “My biggest concern is a potential bubble forming in these emerging markets. We had imbalances that created the last crisis and I’m concerned about the way money is moving into these markets,” he says. He expects oil to trade mostly from $80-$90 throughout December with $90 being strong psychological resistance. “Don’t be complacent, be careful,” he advises.
Richard Ilczyszyn, senior market strategist at Lind Waldock, is also bullish on oil, but attributes it more to the turnout of the recent election with the Republicans gaining control of the House and seats in the Senate. “We get more Republicans in Congress and it becomes more of an oil friendly Congress and government. There may be more of an upside for oil on the political front,” he says. Ilczyszyn advises traders to watch the equities markets going forward warning that if equities can’t keep their upward bias through the rest of the year, oil may have hit a top. Ilczyszyn also expects oil to trade in the $80-$90 range with support at $80 and strong support at $75.