Oil drops as economy and supply weigh on market

Quote of the Day.

Freedom lies in being bold.

Robert Frost

The combination of slow growth in the global economy along with current fundamentals that are starting to show signs of supply outstripping demand have kept oil prices hovering near the lower end of the trading range for the last two weeks. The oil market just does not have enough momentum to push prices toward the upper end of the trading range in the short term nor does it have enough selling momentum to drop it much below the lower end of the trading range at the moment. The market has been in a consolidation pattern since losing about 10% of its value (basis WTI crude oil) as it builds technical support. From a technical perspective the complex may be in a short term bottoming pattern with its next move toward the upper end of the trading range as long as it holds support (WTI support around $90/bbl, Brent support $109.50/bbl).

The main question from a fundamental viewpoint is: Will the refined products market continue to provide support for the crude oil complex? Both RBOB gasoline and HO have been keeping the complex from breaching the aforementioned support areas for crude oil as inventories of both of these products have been in decline for weeks. That said with refinery runs starting to return to more normal levels in the US and even in Europe there should be a bump up in supply of both of these product categories which could then start to pressure prices throughout the oil complex. Today's EIA inventory report should shed some light on the situation in the US.

On the macroeconomic front the data continues to support the view of a slowing global economy. Overnight the latest snapshot of the Chinese services sector (PMI) came in at 53.7 in September compared to 56.3 in August. This is the lowest level since the first quarter of 2011. A clear sign that the economy in China is slowing as both the services and manufacturing sector have been slowing for months. If this pattern continues unabated (with no further stimulus measures from the government) oil demand growth is likely to slow further going forward. With all of the oil demand growth projected to come from the developing world economies and with China representing a major portion of the growth global oil balances will be biased toward the oversupplied side of the equation.

The data out of Europe this morning is not much better than that from China as the services sector in the EU is also slowing. Today the jobs data cycle starts in the US with the release of the ADP private sector survey along with the Challenger jobs cut report. In addition the ISM services sector Index will also be released along with the minutes from the last FOMC meeting this afternoon. As I have been discussing in the report I am not sure how much the oil market will react to today's EIA inventory report with all of the economic data points that have been released so far today and yet to be released during the US trading session.

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