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Morning Petrospective – November 8, 2010

November 8 2010, 08:14

Morning Petrospective – November 8, 2010

he monthly unemployment report was a surprise – it was surprisingly robust. A reported 151,000 new jobs were added against predictions that had been calling variously for increases of 60,000 to 80,000. That should have been unqualified bullish news. On top of that previous job losses were revised down by 110,000, meaning that this report made us aware of 261,000 more jobs than we had. And that was almost 200,000 more people working than had been expected. Granted, the unemployment rate remained unchanged because we need to create that many jobs just to tread water, but it was the best news we have had in a very long time.

Oil prices continued to move higher, although the improvement in jobs was just a contributing factor, as far as we could tell. We believe that oil prices advanced again on Friday more because of upward momentum. Crude oil prices had broken over $87.15 in overnight trading Thursday night into Friday morning, and the early high at $87.22 acted as a magnet that attracted prices to keep moving higher. Heating oil prices had broken 233.45 and 235.75 on Thursday, and that helped those prices continue higher. The higher employment did not help gasoline prices as much as one might expect; after all, a number of those new jobs must mean that there are people driving to work now who were not two months ago.

In a curious bout of profit-taking and bizarre reverse thinking, investors bought the US dollar and sold equities in the strange and certainly mistaken belief that a good employment report might lead the Fed to halt its round of quantitative easing. If anything, we believe that the report would be a sign that the Fed could take as confirmation. After all, the actual work of quantitative easing, the heavy lifting of buying bonds and selling dollars had begun weeks earlier when the Fed telegraphed the coming easing. The latest employment numbers actually reflected the real, but unofficial, start of QE2 weeks ago.

Nonetheless, the dollar moved sideways from about noon on Thursday to a little after 4 AM on Friday morning. At that point it started moving higher, and it did not really stop is advance until about noon on Friday. From there it moved sideways. And the DJIA finished the day up just 9.24 to 11,444.08. It was a quiet and uninspired Friday session with its share of profit-taking, but Friday’s activity did nothing to negate the powerful upside breakout seen on Thursday. There is every likelihood that equities prices will continue higher next week.

But higher equities and a lower dollar were not factors contributing towards higher oil prices on Friday. Since those are supposed to be the stock-in-trade reactions to quantitative easing, we found it odd that investors were not in there again on Friday, especially after the aggressiveness they showed on Thursday. It was valuable for us, though, since it demonstrated that oil prices are now on a course higher that can continue independently of the movements in equities or currencies. And, that is the definition of a bullish market.

The worst of the fundamentals seem to be behind us and, while we would not say that oil is fundamentally bullish here, it is technically bullish and it is being bought by investors who are out there buying all kinds of assets they do not really have any desire to own. In the past, they would have bought Exxon or Conoco or half a dozen other oil producers, if they had been bullish on oil. Or they would have restricted their buying to currencies and equities. But, they have not been content to leave well enough alone, and they cannot live without being long oil. By the new rules of the game, as investors have defined them, all the factors contributing to higher oil prices are in place here. Old-line factors like a possible peaking of inventories or higher consumption are just gravy for investors.

Quantitative easing is the new Iraqi war or cold winter. As long as the Fed is buying stuff and driving down interest rates, oil prices are likely to continue higher. The charts and demand just don’t hurt.

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