Oil price taking cues from currencies and equities

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Life has no limitations, except the ones you make.

Les Brown

In U.S. trading yesterday the markets experienced a pretty strong price reversal as short covering took control during the later part of the trading session. The short covering rally was led by a turnaround in the USD and equity markets which carried through to the oil complex after WTI dipped below $75/bbl on an intraday basis and bounced off of a key technical support level. That said the rally in US equity markets did not follow throughout all of the global equity markets (see below for more details) strongly suggesting that the upward move on Tuesday was more about short covering and not about any change in the underlying trend for most risk asset markets which remains to the downside. One slightly positive note for WTI is prices are above the low made in early August and could be forming a double bottom. Again it is much too early to say with any degree of confidence that oil prices have bottomed at the moment.

The US dollar Index is still in negative territory for the session and that coupled with a bullish API oil inventory report is keeping both Brent and WTI in positive territory ahead of the more widely followed EIA oil inventory report to be released at 10:30 AM EST. A news story out of Saudi Arabia yesterday got a bit lost in the overall noise that was permeating throughout the market. There were reports of clashes that injured 14 people in the oil rich eastern province (mostly Shiite population) that the Saudi government indicated was the work of an un-named foreign power...which is normally the code used by the Saudi's to indicate Iran as being the un-named country. The last time any issues arose in Saudi Arabia were back in March but were put down pretty quickly. So far this is not a big deal but certainly with the way the democracy revolution has evolved in other MENA countries, this is worth watching and putting Saudi Arabia back on the radar.

As demonstrated once again in yesterday's trading sessions (and into today so far) the external markets (currencies and equities) continue to be the main price drivers for the oil complex. All of the questions and concerns I have raised in the newsletter over the last week have not changed with the sovereign debt issues in Europe...or should I say the lack of a long lasting solution to the European debt problems so far...continues to be the main negative clouding overall risk asset markets. The next big event in Europe will come in the second half of November when the G20 meets again and is expecting to hear how Europe will once and for all solve the debt problems (hopefully).

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