Morning Petrospective – October 4, 2010       

ontinuing weakness in the US dollar, the perception that the economic recovery is starting to gain some traction and the somewhat contradictory – but just as bullish – feeling that the Fed is going to give the markets the long-awaited quantitative easing all worked together to boost oil prices on Friday. In the process, crude oil prices printed their highest level in seven weeks.

The US dollar continued to get hammered, falling to its lowest level in six months against the euro. One of the more curious aspects of the recent advance has been the role of quantitative easing, the so-called “Q.E.,” which would be bad for the greenback once it happens – in theory – but has been even worse as a daily expectation.

Because of the daily expectation, currency traders have had what they have seen as a sure thing. They believe it is only a matter of time before the Fed gives the market the QE it expects, so they are selling the dollar ahead of the fact. Even though QE is bearish for the dollar, once we get it we are likely to see profit-taking, possibly even heavy profit-taking as it is removed from currency traders’ calculus. By the end of Friday’s trading the euro had gained 150 points against the dollar. The dollar has not been this weak against the euro since the first quarter, and it has an objective on the charts to 70 euro cents.

Equities were also higher on Friday, with the DJIA up 41.63 points to 10,829.68. Despite that, the DJIA did not remove Thursday’s high, which leaves us with a key reversal on the charts, for now. From the bulls’ perspective, that may be one of next week’s early goals – for the DJIA to remove Thursday’s high and negate the reversal on charts.

None of these would be possible if traders and investors could not build them into the week’s underlying premise that the economy is improving enough for demand to start eating into 27-year high inventories. The DOE report showed drawdowns this week in the three major inventory categories – crude, distillate and gasoline – and that gave traders something to build their story around.

A smaller-than-expected number of first-time claims for unemployment insurance bolstered the belief that the economy can generate new energy demand. And, on Friday, consumer spending rose by more than expected in the US, rising 0.4% against survey averages of 0.3%. Wages and salaries increased by 0.3%, after rising by 0.4% in the previous month, the Commerce Department reported. It was the fifth straight rise in consumption in the US. This seems to have compensated for a University of Michigan/Reuters consumer sentiment index figure which dropped to 68.2 from 68.9 in August. And observers were quick to note that expectations had been for a decline to 67.0, making it yet another weak number this week that did not turn out to be as weak as had been expected.

The US ISM manufacturing index fell to 54.3 in September, from 56.3 in August, and is now at its lowest level in 10 months. This was offset, to a degree, by a better-than-expected manufacturing figure in China earlier in the week. Capital Economics said the figure “is consistent with another quarter of pretty tepid growth to end the year.” And it feel that “2011 is unlikely to be much better.”

Nevertheless, the markets put their best faces on this week’s numbers, and took heart in the fact that several data points were ‘not as bad as had been expected.’ Combined with a first real decline in oil inventories, the mood as we went home Friday afternoon was one of an improving fundamental picture in which the economy seemed suddenly capable of generating very real oil demand going forward.

     FMX Newswire       

FMX Newswire is an overnight news summary designed to meet the needs of professional energy traders. The content is to-the point, professional grade and not widely reported in the mainstream media. All sources are professional respected firms and newspapers.

Platts oil

• Iraq announces a 25% increase in the country's proven oil reserves to 143.1 billion barrels from 115 billion barrels.
• The accredited bunker suppliers in Singapore reached 80 in Oct, the largest number since launching its license scheme in 2005.
• The Houston Ship Channel was shut Sunday, after a barge struck an electrical tower in Baytown, Texas, downing a power line.

Bentek Energy

• Pacific NW Observer - Demand Falls Over the Weekend, Rebounds Slightly Today
• Supply/Demand Balance Analytic Report - Cooler Temperatures Drive Demand Lower While U.S. Production Rebounds
• Power Burn Analytic Report - Power Burn Declines 4 Bcf/d Over the Weekend

Bloomberg 

• Crude Oil Drops From Eight-Week High as Investors Sell to Secure Profits
• Hedge Funds Cut Natural Gas Bullish Bets Most Since August
• Oil Rising to $85 in '11 Survey Threatens OPEC on BRIC Demand
• Iraq Lifts Oil Reserves Estimate, Overtakes Iran
• Houston Ship Channel Is Closed to Inbound Vessels Until Tomorrow Evening
• Sinopec Group Pays `Very High' Premium for Brazil Oil Reserves

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