Oil demand growth looking sub-par

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There is a wisdom of the head, and a wisdom of the heart.

Charles Dickens

Volatile was the single best way to describe the activity on Tuesday and pretty much this entire week so far. On top of the massive relief rally that got underway after the US Fed announced that they were going to leave short term interest rates near zero for the next two years, the API released their weekly inventory report (see below for more details) that showed an extremely large decline in crude oil stocks as well as modest declines in refined product inventories. Simply a bullish fundamental snapshot. That sent oil prices off to the races because oil was unable to get into the positive territory during the Bernanke relief rally. Oil traded in over a $7/bbl trading range on Tuesday with prices up well over 3.5% so far today. As of the moment I would categorize the rally in oil (and the gains in just about everything since yesterday afternoon) as still a short covering rally as the concerns over the slowing global economy has not changed all that much over the last 24 hours.

What has changed is that the Europeans continue to buy the debt of the weak EU member countries like Italy and Spain and the US Federal reserve assured the market that it will keep interest rates low for years not month. The Fed pledge is viewed as another way of driving cash into the risk asset markets as participants look for yields. At least since yesterday afternoon that logic has worked as money seemed to move into the equity and commodity market in conjunction with the shorts heading to the sidelines. The bad news out of the FOMC meeting is the fact that the Fed said the US economy is growing considerably slower than expected. So yes money may likely continue to flow into equities which should be supportive for oil prices but the underlying fact that the US economy, as well as most other economies around the world, is growing at a snail's pace and is still troubling and clouding a sustained rally at the moment.

As shown in the following table of the EMI Global Equity Index all ten bourses in the Index have participated in the relief or short covering rally since yesterday afternoon. However, the Index is still showing a loss of 2.5% for the week while the year to date loss for the Index is close to 18%. All ten bourses are still in negative territory with the US still the leader of the pack with the smallest year to date loss. Even with all of the negativity surrounding the US economy of late from an equity investment point of view it is still the optimum place to invest compared to any other market shown in the Index. Seven of the ten bourses in the Index are still showing double digit losses with both China and Canada on the cusp of going into double digit territory also. Right now I would categorize the markets as being driven by those looking for yields with lots of eyes focused on the equity markets. Whether or not the market rout has ended is still a bit unclear as the markets will quickly be turning away from the actions of the ECB and the US Fed and once again starting to focus on the next round of macroeconomic data. A bumpy ride is still expected in equities and thus also in the oil and broader commodity complex.

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