Oil stock decline expected this week

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We are drowning in information but starved for knowledge.

John Naisbitt

Crude oil prices surged higher to start this shortened trading week on a combination of short covering and catch up from last week's strong gains in the financial markets as well as a new round of buying by the funds as they set-up their books for the second half of the year. That all said I think the moves in prices this week are already overdone as there is little support to justify the move on Tuesday. As I warned in yesterday's newsletter I thought there was a possibility that the market may begin to trade on the perception view that the global economy would recover at a faster pace than it did during the first half of the year. I have to conclude that based on yesterday trading pattern that there aforementioned mentality is starting to set into the market sentiment.

I must admit I am not yet a believer of this view as I would like to see a lot more supporting macroeconomic data to substantiate this view. A major piece of data will hit the media airwaves on Friday when the US Labor Department will release the latest non-farm payroll data for the month of June. After a very disappointing number last month the market is expecting a gain of 80,000 new jobs with the unemployment rate holding steady at 9.1%. This would be a marginal improvement over last month's 54,000 new jobs but still well below the level that is needed in the US to just keep up with new entrants into the market. I must admit if the actual jobs report is in sync with the expectations it does not suggest to me that economic growth in the US is accelerating by any means.

Although oil prices gained ground on Tuesday they did not get much support from the equity and currency markets as global equities were mostly lower while the US dollar was stronger (although it is now heading lower as of this writing). So far the global equity markets lost about 0.5% on the week as shown in the EMI Global Equity Index table below. The Index is now down by 3.4% for the year with six of the ten bourses in the Index still in negative territory. The US Dow is still holding the top spot with Brazil at the bottom of the list with a 9% year to date loss. For the moment both equities and the USD are not supportive for oil prices as well as the broader commodity complex.

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