A Study in Contradictions
It's no wonder that oil is on track to have one of its flattest trading years since 2003. The last minute late November selloff was another sign that the bulls and bears lack true conviction as they try to make sense of some obvious and some obscure fundamentals that are driving the price in this somewhat wide swinging emotional oil market. In fact, the trading swan song for November and the first of December snap back really symbolizes amenity of the entire year in the oil market.
In a normal time, a better than expected readings on U.S. manufacturing and consumer confidence might inspire an oil rally. You might think that oil would celebrate the fact that business expanded at a faster pace than thought for as the Institute for Supply Management-Chicago Inc. rose to 62.5 the highest since April from 60.6 in October, increasing hopes that manufacturers would hire and invest in new equipment as their business booms. Or perhaps the market might take heart from the fact that consumer confidence soared to a reading of 54.1, the highest level since June in the heart of the Christmas shopping season.
Yet with the dark clouds emanating out of Europe and commodity funds getting frustrated with their $100 barrel oil bets, prices drove lower as funds wanted to take what profit incentive fees they could before they go flat for the holiday and start shopping for that GI Joe with the Kung-Fu grip for their kids. That was the case even as the dollar rallied, capping off a month where the dollar rallied off its QE2 lows hitting the highest levels since the Fed hinted that they would print more money as investors seek shelter from economic storm clouds in Europe.
The oil bulls lost their moxie as risk in the Euro-zone soared and the bailout of the Irish Banks failed to convince them that the debt crisis will not spread. The EU has spent over €200 billion to bail out just two of the PIIG nations, Ireland and Greece, and traders are doing the math trying to figure out the final tally when the rest of the PIIGS like Spain, Italy and Portugal will come to the trough. The fear of contagion raised fears of oil demand destruction despite the fact that the German economy is flourishing and their unemployment hit the lowest level since 1992 with their manufacturing sector is soaring. Oil looked at the barrel half empty and the mood was sour.
Yet today that barrel is half full as oil has found its optimism in a new month and strong economic data. China, that great hope of the oil bulls and Europe, has the bulls once again looking beyond their inbred fears. The China Federation of Logistics and Purchasing said Wednesday that China's official purchasing managers index (PMI) rose to 55.2 in November from 54.7 in October, beating private economist's forecasts and oil bulls forgetting the fact that this might inspire more tightening by the Chinese government.
That is a problem for another day, perhaps because Spain's stock market is even rallying after a slew of better than expected economic readings out of Europe. Like Ireland's manufacturing PMI: 51.2v 50.9 prior or Spain Nov Manufacturing PMI: 50.0 v 51.2 prior or Italy Nov PMI Manufacturing: 52.0 v 53.0 or France Nov Final PMI Manufacturing: 57.9 v 57.5e or (GE) Germany Nov Final PMI Manufacturing:58.1 v 58.9e or Greece Nov PMI Manufacturing : 43.9 v 43.6 prior on the entire Euro Zone Nov Final PMI Manufacturing: 55.3 v 55.5e. And in Germany, data showed that retail sales increased 2.3% in October from the previous month, exceeding market expectations. Not to mention that bailouts of any kind have been bullish for oil.
Even if the contagion spreads, the market will expect a bailout and go along expecting an uptick in energy demand. That will allow bulls to focus on the potential for a tightening in global supplies even as U.S. oil stocks hover at the highest levels since the 1980's. Of course the comparison to 2003 might be contradictory as well as in 2004 when the oil bull market rallied nonstop into the credit crisis of 2008. Contradictions of course lead to wide trading ranges with many opportunities.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at email@example.com.