Bearish crude fundamentals belie bullish forecast by banks

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Steve Grasso

Once the Goldman Sachs bullish recommendations hit the market oil prices (and many other commodity prices) moved into positive territory and stayed there throughout the trading session on Tuesday although they came very close to moving into negative territory at one point about mid-day. Beyond that the market moved almost tick for tick at times with the direction of the U.S. dollar. The U.S. Dollar Index retraced a bit yesterday adding a bit of fuel to the oil fire and keeping prices supported. One by one the Wall Street companies like GS, JPM, MS and now Barclays have all came out with bullish forecasts for oil prices. Whether or not all of the bullish recommendations will be enough to put a floor on prices in the short term is still a bit of a wildcard. The main drivers of oil is the strength of the global economy and the resultant impact on global equities have been biased to the bearish side for oil while the direction of the U.S. dollar has been mostly upward after bottoming out early in the month and has also been mostly negative for oil.

On the geopolitical front the fighting rages on in Libya as the country is obviously in the midst of a civil war. There are no indications that the end is near or that a diplomatic solution to a Gaddafi exit is at hand but NATO and the west are ramping up the attacks which should bring added pressure on Gaddafi and his supporters. In addition Libya's main source of revenue is oil sales and at the moment they are mostly nonexistent. The rebels are starting to get aid from the west while Gaddafi and his supporters are not exporting oil nor receiving any oil revenue. Eventually that has to impact the masses who support Gaddafi as the combination of a lack of revenue as well as the impact of massive sanctions on Libya have to get the supporters of Gaddafi starting to recognize they chose the wrong side. I still think a diplomatic solution is possible and as such the biggest risk surrounding Libya is a Gaddafi exit which would result in a $5 to $10/bb move lower for the price of oil (relatively quickly if it happens).

So far this morning oil is back on the defensive as the U.S. dollar is back in positive territory pushing oil prices lower while last night's modestly bearish API oil inventory report (see below for more details) is adding further support to the oil bears. The USD is continuing to be driven by the growing concerns over the evolving sovereign debt crisis in Europe that not only does not seem to be going away rather it seems to be spreading deeper within the EU as evidenced by the downgrading of Belgium on Tuesday...a non PIIGS country. In addition a forecast for German consumer confidence is expected to fall next month which suggests that the ECB will not likely raise interest rates next month and put more pressure on the falling euro and thus be supportive for the USD and a negative for oil prices.

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