Morning Petrospective – October 18, 2010
fter trying most of the week to break key resistance levels at $84.43 in crude, 233.45 in heating oil, and 220.11 in gasoline, oil prices ran out of upward momentum on Friday and sold off steeply. None of the three major contracts came anywhere near their major resistance on Friday, after making some progress on Thursday, but ultimately failing and coming up short of reaching the major highs.
Oil prices tried to take cues from the euro and from equities, but both of those markets sent mixed messages. The dollar was weaker in early trading, but it rallied as the day wore on. And equities started moving higher before ending with a loss.
The DJIA ended the week at 11,062.78, down 31.79 on the day. Equities had been higher on the day, partially in reaction to a Ben Bernanke speech which kept open the possibility of additional Federal Reserve stimulus – or quantitative easing. Investors bought initially on that, but shortly thereafter the question was raised: What have equities been advancing on for the last few weeks? The answer is the quantitative easing that the Fed said Friday it is still open to providing. Equities discounted a vague hint and elevated it into the mental equivalent of a done deal. On Friday, it remained a “possibility” that had already been completely discounted by market prices.
The combination of lower equities, a resurgent US dollar, which rallied after almost touching its long-term objective to 70 euro cents, and a sense that nothing more than the “possibility” of quantitative easing had been accepted as a done deal worked together to push oil prices lower. That is where the technical inability to break the levels mentioned above came into play.
As we end this week, November crude prices ended down $1.41 a barrel. November heating oil prices were down 5.11 cents a gallon, gasoline was down 4.74 cents a gallon, and November natural gas priceswere down 11.6 cents per million Btu. Early in the week, oil prices were up dramatically, and crude oil’s open interest was up 63,000 contracts from Thursday (October 7th) to Thursday (October 14th).
The University of Michigan’s index of consumer confidence dropped from 68.2 in September to 67.9 in October, but Capital Economics said that this measure is “better than it looks for two reasons.” But, it quickly added, “There’s nothing disguising the fact that confidence remains at levels consistent with fairly subdued consumption growth.” CE noted that “After applying our own seasonal adjustment, confidence actually increased from 66.7 to 68.4.” And it explained that the “expectations index is consistent with annual consumption growth of of less than 1%. September’s retail sales figures suggest third-quarter consumption growth may come in between 2.5% and 3.0%.” CE also looked at CPI and retail sales figures and said that those “figures will do little to ease the Fed’s concerns that inflation is too low and that economic growth is too low.”
The economic data is not helping – unless one sees it as a guarantee that quantitative easing is on the way. The Fed says it is still a possdibility, but investors have discounted QE’s arrival for the last four weeks. They need more than the Fed telling us it is a possibility.
The French strike remains a factor in the global refined products markets, but it was not a major motivator on Friday. Traders were looking at the oil markets’ inability to break over resistance, and they sold against weakness in equities and the resurgence in the dollar.
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