Oil bounced back on an array of supportive news, yet the most supportive news over all was the snap back across the commodity spectrum. Led by the grain markets and the fears of dwindling supplies, the commodities complex seemed to be the leaders not the followers across the finical universe. The commodities were not following the dollar or the Euro, they were leading them. The question is whether or not commodities can continue to lead as many have seen clear technical damage to their sharp uptrends in recent weeks.
Some of the factors that led to the oil rally really started long before the Energy Information Agency supply report. The API report the night before signaled that perhaps the EIA report was not going to be that bearish. The complex surged after a surprise drawdown in gasoline supply. Then overnight comments from some IMF officials basically praising Greece for the reforms they have taken seemed to suggest that the IMF was likely to come to Greece's aid.
That brought the VIX index down sharply and the commodity traders seemed confident that we could put Greece behind us, and we know that if that happens the Euro will strengthen against the dollar again driving traders back into that popular profitable trade. Still, because of the more subdued reaction on the currency front and with the commodities leading the way, it seems that forex traders are a bit more skeptical that Greece can continue to get kicked down the road.
Then you had the late weather reports for the grain complex. In the largest corn producing states it seems that this weekend's planting is going to be washed out. Add to that drought fears in Europe and Russia and lost acres due to the Mississippi floods, it seems that traders are now very concerned about global supply. This hard boost in commodities really was led by the grains that helped feed overall bullish momentum.
That brings us back to oil and the much anticipated weekly petroleum status report. The EIA helped feed into the bullish momentum by reporting a drawdown in Cushing Oklahoma supply and a disappointing build in gasoline. Add to that some hype over the wildfires in Canada and you had more than a few excuses to participate in the broad based commodity rally. Gasoline production did rise averaging 9.1 million barrels per day and refinery runs increased to 83.2 percent. Overall crude supply was unchanged from the previous week and gasoline inventories increased by 0.1 million barrels. Crude import fell as well averaging around 8.6 million barrels per day last week, down by 394 thousand barrels per day. The numbers, while supportive, would not have had the same price impact if it were not for some of the grander commodity market forces at play.
The International Energy Agency is sounding another warning ahead of the upcoming OPEC meeting about the impact of rising energy prices. Perhaps this concern is being enhanced with the announcement that President Ahmadinejad in Iran will attend, perhaps looking to block any increase in oil production. MarketWatch reports that "The governing board of the International Energy Agency Thursday expressed ‘serious concern’ about growing signs that the rise in oil prices since September were affecting the economic recovery. The IEA urged producers to help avoid the negative consequences from high energy prices and said it ‘welcomes commitments to increase supply.’ The board noted that high oil prices were widening global imbalances, reducing household and business income, and placing upward pressure on inflation and interest rates. The agency noted that crude-oil prices remain at elevated levels despite a 10% correction since May 5. The IEA added that enhancing ‘consumer-producer dialogue is urgently important’ to reach both short- and long-term solutions."
The other key issue for traders today is President Obama's speech on the uprisings in North Africa and the Middle East known as the Arab Spring. The administration realizes the historic opportunity this is, not only for the US government, but for the people that have lived under repressive regimes and the world at large. The President is going to offer financial support to the fledgling democracies in Tunisia and Egypt and layout a blueprint of support for change in the region.
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.
