Oil outlook forecasts continued tightening of supplies

“Presence is more than just being there.”
Malcolm S. Forbes

The combination of China raising interest rates and the situation in Egypt showing early signs of stabilizing still resulted in oil prices holding up relatively well on Tuesday. Prices were hit with a strong round of selling shortly after the China announcement but stabilized during the trading session. In fact Brent moved back and settled over the $100/bbl mark once again. Oil prices are trading around the levels they were at prior to the ramping up of the Egyptian protests with market participants now moving their focus back to the main drivers that have been impacting oil prices for the last two years…the direction of equity and currency markets, the pace of the global economic recovery and the state of the current and projected oil fundamentals. None of these drivers are currently overwhelmingly bullish or bearish, but in general the market is likely to remain in the wide trading range it has been in for quite some time with a modest bearish bias to the downside or suggestive that prices could work their way toward the lower end of the trading range…especially for WTI.

The equity markets have been taking the interest rate action in China relatively well having gained ground a bit over the last 24 hours as shown in the EMI Global Equity Index table below. The Index is now higher by 0.2% for the week narrowing the year to date loss to 0.5%. China and Brazil remain the main negatives in the column for 2011 so far with Paris and Germany holding the top spots. China's Shanghai A shares declined modestly after being closed for a week (due to the New Year holiday) and after incorporating the latest interest rate rise by the Chinese government. The global equity markets remain neutral for oil prices in the short term as does the US dollar index which is hovering around the unchanged mark once again.

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