Oil waiting on Bernanke press conference

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I don't know the key to success, but the key to failure is trying to please everybody.

Bill Cosby

Today is Bernanke’s day. The business media have been covering the US Federal Reserve's first ever press conference after an FOMC meeting around the clock. There is so much build up to this press conference that, like with most things that are highly and widely anticipated, often times the actual event turns out to be a non event. It reminds me of a song "Is that all there is" that we may be singing after the press conference is over. Overnight oil prices were mostly range bound in quiet trading ahead of this morning's EIA oil inventory report as well as the big Bernanke press conference. Last night's API inventory report (see below for more details) was mostly neutral. However, unless the EIA report is grossly different from the expectations, I do not expect much of a price reaction until after the FOMC press conference is over and digested.

Where the price of oil goes from here in the short-term will be mostly dependent on how the US dollar trades over the next few days. The US dollar Index is continuing to hover near levels not seen since the middle of 2008 and the only reason why it is not moving with more momentum (in either direction at the moment) is due to market participants waiting on the Bernanke press conference. As discussed in detail the market will be primarily looking for any clues as to the status of QE2, when the Fed will switch to a less accommodative policy, Bernanke's view on inflation as well as the state of the US economic recovery.

Leading up to this meeting the market view has been that the Fed will continue to keep their foot on the accelerator of easy money for the short to medium term. If there is any deviation from that view (signs of tightening sooner than later) I would expect a strong short covering rally to ensue in the US dollar which will in turn result in equities, oil and commodities declining. I would be very surprised if the Fed announced any change in their monetary policy today either in the FOMC minutes or during the press conference. The US economic recovery has certainly not been very robust and any indications of a switch in monetary policy is likely to result in an even slower economic recovery with unemployment remaining at unacceptably high levels for an extended period of time. I think Bernanke will present a picture of a slow but improving economic recovery and indicate that when the data supports it the Fed will take the necessary steps to fight inflation. For now all is status quo in Fed policy. If that scenario is the end result today I would expect a modest sell-off of equities and oil in a “buy the rumor & sell the fact” type short-term trade. But when the dust settles, the US dollar will move lower and equities, oil and commodities will resume their upward movement.

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