Oil looking toppy amid economic headwinds

Quote of the Day

If you do not hope, you will not find what is beyond your hopes.

St. Clement of Alexandra

Yesterday was a whipsaw kind of trading session as US Fed Chairman Ben Bernanke painted a negative picture for the US economy in his opening remarks but gave no indication as to what direction the US Fed is moving toward insofar as a new round of quantitative easing. The markets sold off during his opening remarks as the QE crowd headed to the sidelines. However, as the market digested his comments and testimony oil, commodities and equities gradually regained their footing as Mr. Bernanke said (as he has been saying ) that the US FOMC will take whatever action is necessary and they still have tools in their toolbox. So simply put Mr. Bernanke's comments were consistent with the comments he made at the presser after the June FOMC meeting as well as consistent with the minutes from the June FOMC meeting released about a week or so ago. The only change is the acknowledgement that the US economy is doing worse than the Fed previously projected which is not really new news to the market based on the plethora of macroeconomic data that has been released over the last several weeks and supportive of that view. Mr. Bernanke speaks before the House side of Congress today and I would expect more of the same.

Basically easing is a possibility but as I have been saying it is not a guarantee. I still rate it as a 50/50 chance at best. The economic data has to continue to deteriorate suggesting that the US economy is continuing to slow and move toward the recession level for the FOMC to act with a new round of QE. I do not think the Fed will act at the July 31 - August1 FOMC meeting with the earliest possibility of an announcement coming during Mr. Bernanke's speech at Jackson hole at the end of August (as he did a few years ago) followed up at the mid-September FOMC meeting. This will give the Fed many more data points to get more comfortable with the short to medium term direction for the US economy. The guessing game will continue with any and all bad economic data points likely met with buying on the premise that it signals the probability of QE3 is increasing.

Oil is getting toppy at current levels once again as most market participants continue to focus on the major headwind in the market...the slowing global economy. When the potential for quantitative easing is pushed down the road traders and investors have nowhere to look other than the simple fact that the economies of the US, Europe and China (and others) are all slowing and thus global oil demand growth is also slowing as we saw in all of the monthly forecast reports over the last week or so (IEA, EIA and OPEC).

Another indication of the slowdown in oil consumption is the decline to a 17 month low in the number of VLCC (2 million plus barrel capacity) ship charters booked according to an article in Bloomberg quoting ship broker Marex Spectron Group. They are projecting a decline to 115 fixtures in July a 10% decline from June and the lowest level since February, 2011. A reduction in charters heading to China represents the largest part of the decline. The fundamentals remain biased to the supply side with a shortage of demand still the main feature in the global oil market.

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