Oil looking for excuse to go higher

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The oil complex firmed on Tuesday in spite of the bad news that hit the media airwaves in the form of negative macroeconomic data. All of yesterday's US macroeconomic data was bearish suggesting that the U.S. economy is slowing to a snail's pace while the data coming from other parts of the world was mixed at best. No matter how we slice and dice the data at this point in the week it all points to a slower growth pattern for the global economy which in turn should result in a slackening of global oil demand growth. However, the way the market reacted to the bearish news suggests that we are fully in a mode where oil prices are looking for any excuse to push higher as we saw the market quickly discount the bearish news and will likely overly embrace anything that is remotely bullish.

On top of the weak economic data the fact that the EU sent out signals yesterday suggesting that yet another bailout is likely in the cards for Greece was enough to firm the euro at the expense of the US dollar (and other major currencies). The direction of the US dollar remains highly (inversely) correlated to the direction of oil prices and a weaker US dollar has been supportive of higher oil prices (and other major commodities) so far this week.

Around the world China's PMI data came in last night below last month but marginally above the market expectations. China's manufacturing sector expanded at a slower pace in May basis the May PMI index falling to 52 versus April's 52.9 but above the market expectations of 51.6. A reading over 50 still suggests an expansion in the manufacturing sector but at a slower pace. The aggressive monetary tightening that has been in place in China for almost a year is keeping a lid on growth in China. This coupled with many other countries' economies slowing has likely reduced the requirement for goods produced by China and thus eventually oil and commodity demand in China. So far the market has mostly ignored the China data (again discounting the negative news).

In fact overnight several other countries reported a slowing of their manufacturing sectors basis a reduction in their current PMI number versus last month. Taiwan, India, Ireland, Sweden, Turkey, Poland, Spain, Czech, Italy, Germany, France, UK and South Africa to name a few all saw their manufacturing sectors slow during the month of May. It seems that a global slowdown in manufacturing may be under way and that is certainly not very bullish for oil consumption nor consumption for most any traditional commodities. Adding to the downturn in manufacturing just discussed Australia's economy contracted 1.2% in the first quarter. The decline was the largest drop since the March quarter of 1991. The natural disasters that hit Australia have had a significant impact on the lack of growth in the economy.

Overall the oil market remains in a "look for a reason to buy mode" rather than being ready for any significant sell-off at the moment. The US dollar push was enough to send oil out of its technical triangular consolidation pattern closing above the $101.50/bbl resistance level basis the spot WTI contract. Whether or not there is enough momentum in the short term to send prices to the next technical test of the longer term range high of $104 to $104.50/bbl is still a question.

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