Oil drops on Fed minutes and surprise inventory build

Expected range of $102-$107

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The oil market was hit with a one-two punch that has sent prices toward the lower end of the trading range. First the latest minutes from the last US Fed FOMC meeting suggested that the Fed may be backing away from additional stimulus or a QE3 which is a positive for the US dollar and an overall negative for oil and the broader commodity complex. Second the API reported another huge build in crude oil inventories of close to 8 million barrels (see below for a more detailed discussion) but yet to be confirmed by the more widely followed EIA inventory report (released today at 10:30 am). Yesterday was an overall bearish day for the secondary price drives of the oil complex as the geopolitical risk in the market remains present but overall quiet.

Chart 1

Even with oil prices declining over the last 24 hour I am still expecting prices to remain in the $102 to $107/bbl trading range for the next several weeks (at least) as the Iran/West meetings approach. Geopolitical risk will continue to be the main price driver with oil fundamentals and the state of the global economy still playing a secondary role. Even with the news that a QE3 may not be in the cards along with US manufacturing data that came in below expectations yesterday and API stocks that built more than expected the downside reaction has still been somewhat muted. Geopolitics is serving as a price floor at the moment in what otherwise would have been a much steeper drop in oil prices. In fact absent another round of stimulus without the possibility of a supply interruption in and around the Middle East oil prices (basis WTI) would likely be back the mid $90's.

The Fed minutes were also discouraging to the risk asset market bulls as values have declined across the board for just about all commodity and equity markets. On a positive note the Fed's cooling on the idea of more stimulus suggests that they view US economic growth as starting to stabilize and likely to continue on its own.  In addition if the Fed is not going to add more stimulus to the market it is a positive for reducing the potential inflation risk while opening the door for the next move by the Fed which might be to start to suggest that the easy money policy may be slowly coming to an end.

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