Continued oil selling shows focus on weak economy

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Tuesday's trading action was a continuation of Monday as well as most of last week...selling dominated the activity throughout the entire session as the US debt bill was signed, sealed and delivered. The ending of the debt debacle had no positive impact on the markets except for a very short period of time on Sunday night when the markets just opened for the week. The way the markets have traded post debt deal suggest strongly to me that the majority of the selling last week was more to do with the faltering global economy rather than uncertainty over the US politicians doing a deal. If last week's selling was mostly debt related (which many thought) the relief rally would have lasted a lot longer than a couple of hours and likely both equities and commodities would still be rising. Since they are not the market is telling us it was really focused on the economy all of the time with the debt talks just detracting attention a bit.

Oil prices are now down for the third day in a row or the longest stretch of down days since back in May also suggesting that the bears are starting to retake control of the market and buying dips is not the mode to be in. Rather we seem to be approaching a sell any rally mode based on trading activity this week so far. Oil is technically weak, fundamentally weak and it has no support from the external markets as they are all weak and suggesting that the global economy will slow even further. For oil the single biggest headwind is the global slowdown in manufacturing. This is an energy intensive sector and will likely result in a slowing of global oil demand growth and thus a consistent restocking of global inventories. Unfortunately there is nothing encouraging in the macroeconomic data front that suggests the slowing is more representative of the past and better or more accelerated growth is coming.

From a technical perspective WTI closed below the $94/bbl support level and now has a clear path to test the June lows of $90/bbl barring something bullish in the short term. As shown in the following chart of the Sep Nymex WTI contract the market has been pretty much in a downtrend since peaking back in late April with a more clearly defined downward move coming into play since about early May. At the moment unless oil gets some support from the economic data or the fundamentals I would say the probability of oil heading down to the $90/bbl level is gaining momentum.

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