Oil correction is not over despite one-day rally

May 24, 2011 07:00 PM

Big Bull Calls!

The bulls were back if only for a day, some say because of some big bull calls. Is it just bull or did these calls help drive yesterday’s trade? Or do we give the predictors of $200 a barrel oil too much credit? Goldman Sacks was back, reversing their previous bear call and JP Morgan also had their say.

Goldman Sachs Group Inc. blamed Libya for their bullish change of heart raising its forecast for Brent crude because the loss of Libyan crude will lead to an “effective exhaustion” of OPEC spare production capacity. At the same time JP Morgan also focused on the lack of Libyan oil production as a reason to be long oil. While these forecasts seem to make sense and came on a day when oil rebounded, in the near term do these calls really matter as the threat to global demand is rising.

Oil and product prices, despite yesterdays impressive rebound, were probably no more than a dead bull bounce. Significant challenges in Europe and Greek debt, as well as threats to Chinese demand, could significantly change the longer term outlook. Not only is China’s economy facing perhaps a significant slowdown, there are fears that drought could cause electricity shortages hurting industrial production and add to their inflation problems by further increasing food costs. Japan is in a recession and the hopes of a surge in energy demand to rebuild have not yet materialized. With QE 2 on its way out and global central bankers realizing that their policies may be inflaming commodity prices, it seems that the correction in the oil market is not yet over. Remember as I have said from day one that quantitative easing is bullish for commodities. Oil demand is falling and the euro carry trade is really over.

Weak gasoline demand in the United States as reported by the MasterCard Spending Pulse report and a build in gasoline supply according to the American Petroleum Institute report, should take away concerns that the price for oil products will be ready for a sharp snap back. MasterCard reported that gasoline demand was down by 131,000 barrel per day or 1.4% to a less than spectacular 9.176 million barrels per day. The American Petroleum Institute reported gas inventories rose by 2.44 million barrels, a sign that worries about gasoline supply may be overstated despite refinery problems in Venezuela and Joliet Illinois.

The refinery issue in Venezuela is important because the refinery is helping feed the incredible growing demand in South America. The United States will have to make up for those lost exports and will further solidify the U.S. position of being a gasoline exporter to the South American emerging markets. We are now of course a net exporter of gasoline and U.S. refiners have found a very willing and growing customer base.

Longer term oil appears to be in a choppy down trending market that targets the mid eighties for oil. We should perhaps see oil bottom in late June or early July as the market tries to price in a post QE2 world. In the mean time, the ranges both up and down can make for some tremendous short term opportunities keeping in mind of course the risk that is always inherent in the futures markets. Wide swings and charts sticking to the expected script should be good near term until things change once again. Still we have to be aware that outside commodity moves may influence oil. Concerns about the rain or no rain on the grains could send those commodities skyward providing sector support in the oil.

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 is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil 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.