Oil heads lower, breaking from the pack

What's happening with black gold?

Oil broke bad and even boldly as it was hit hard while the rest of the market went crazy in the aftermath of the government shutdown. Oil lost its correlation with the rest of the commodity complex at least for the moment and maybe for the foreseeable future.

Oil is feeling the weight of rising inventory and the reluctance of the stock market to continue to drive higher in yesterday’s trade. Yet overnight the stocks seem to have lost the reluctance to soar into uncharted territory after the China GDP that hit 7.8% dining stock markets higher around the globe. The gloves are off and the risk trade is back and commodities are going wild! The carry trade is back in vogue and the markets look like we have hit a major bottom in the commodity indices. Yet oil amazingly enough looks like it does not want to participate. The reason is that it seems that oil is decoupling at least in part from the commodities as an asset class and may start becoming non-correlated. It seems that in the aftermath of the government shutdown and the surging US production the fundamentals favor the bears.  Not to me the world powers talking to Iran and no war in Syria have reduced the geopolitical risk premium to the lowest level in decades.  Can anyone remember a time where the possibility of a potential future attack on Iran did not figure into the equation of the price of oil?

As for the rest of the complex the government shutdown is turning out to be wildly bullish. Even hawkish members of the Fed like Richard Fisher acknowledge that the possibility of tapering is off of the table. The damage done to the economy by the government shutdown both real and imagined should set the stage or explosive rallies, yet oil must be drug up kicking and screaming. Copper had its best week in seven. Gold and silver defied the bears that seem to not understand the complexities of fundamentals that control that market. Still the key is $100 a barrel is the key. This is the most important physiological point in the marketplace as it was the point that put oil into that geopolitical risk trading range. With that risk reduced a breach of that area should open up a sharp drive to the downside. 

Natural gas fell on a warm weather forecast. David Bird, of Dow Jones, reports that "Above-normal temperatures are likely across much of the U.S. in November through January, government forecasters said Thursday. The outlook from the National Oceanic and Atmospheric Administration doesn't show below-normal temperatures during the three months in any area of the nation. NOAA sees the greatest likelihood of above-normal temperatures occurring in New England and in the southwest, in eastern New Mexico and west Texas. Above-normal temperatures are expected to blanket the nation's midsection, where the largest concentration of homes relying on natural gas for heating are located, and the Northeast U.S., the nation's biggest market for home-heating oil.

NOAA sees equal chances for normal, below-normal or above-normal temperatures in the southeast and in the northwest stretching from west of the Great Lakes to the Pacific Coast. NOAA said it doesn't expect El Nino or La Nina weather conditions to appear into spring 2014.

El Nino is the name given to the unusual warming of the waters of the equatorial Pacific Ocean, with broad-reaching impacts. NOAA has said that among El Nino's impacts are potential dry and warm conditions in normally wet regions of the world such as Indonesia and Australia, while places that are normally dry, like western South America and the southwest U.S. tend to be much wetter than normal. The opposite of El Nino conditions is La Nina, or the unusual cooling of the equatorial Pacific. El Nino contributes to more eastern Pacific hurricanes and fewer Atlantic hurricanes, while La Nina contributes to fewer eastern Pacific hurricanes and more Atlantic hurricanes, NOAA said.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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