Oil’s failed follow through to upside

Did oil break down because the economy is better than we thought? Oil failed to follow through on another upside breakout which has been a common story this year. Every time this year that oil has taken out a major psychological resistance, the market has failed to live up to its bullish technical expectations. Of course the reason that oil failed this time was due in part to the thought that perhaps the US economy is not as bad as we previously thought. The oil market got a pounding as it ended the month of November as fears spread that the debt crisis in Ireland would bleed over and impact other EU nations.

The fears were real that contagion in the region would be bad for the Euro and oil demand as well. The Euro sank as did oil and uncertainty reigned. The dollar received the bulk of the safe haven bid as the US seemed to be the safest place to run to. Then we had a rash of strong manufacturing data across the globe and a guarantee by an unnamed U.S. official that said the International Monetary Fund would back an EU lending program. It didn't take long to bring back an appetite for risk and along with it oil demand expectations as well as sending the dollar lower.

Yet a dark cloud in the form of a bad monthly jobs report sent the dollar falling and commodities soaring. The carry trade was back in vogue and the dollar suffered even more loses. The dollar turned around in a big way on a sign that perhaps the jobs market might be turning around. The dollar was already showing some resilience and soared after a Labor Department report that showed that job openings in the U.S. rose in October for the first time in three months hitting the highest level in two years. The report showed that job openings increased by 351,000 to 3.36 million, the most since August 2008.

The rebound in the dollar led to a big selloff in commodities across the board and a key reversal in more than one market. At the same time, the Energy Information Agency arm of the Department of Energy increased their oil demand forecast for 2011 based on forecasts for stronger economic numbers but not by as much as some oil bulls had hoped for. The EIA said that oil will average $86.08 a barrel next year, up from last month's forecast of $85.17. Prices in 2010 will average $78.98, 18 cents higher than November's estimate of $78.80. The EIA seems to be reacting to the strong manufacturing data that we have seen.

At the pump the EIA says it expects that regular-grade motor gasoline retail prices will average $2.88 per gallon this winter which is 22 cents per gallon higher than last winter. For retail diesel, prices are expected to average $3.14 per gallon this winter which is an increase of 35 cents per gallon over last winter. They expect that heating oil prices will average $3.17 per gallon this winter.

In the new year of 2011, higher crude oil prices combined with higher refiner margins is expected to push annual average prices for motor gasoline and diesel fuel to $3.00 and $3.23 per gallon, respectively. The EIA also says that the average household expenditures for space-heating fuels will total $962 this winter, about the same as last year's expenditures. EIA projects higher expenditures for heating oil and propane, but lower expenditures for natural gas and electricity. This forecast reflects higher prices for all the fuels, although electricity prices increase by only 1 percent. However, a forecast of milder weather than last winter in all the regions, except the Northeast, leads to lower fuel consumption in those areas.

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 pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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