Morning Petrospective – November 23, 2010       

he oil complex was mildly lower again on Monday, with gasoline prices leading the way lower. Gasoline had been gaining on both heating oil and crude oil in recent weeks, and the gains were very premature for anything seasonal. It seems that the counter-seasonality of the strength there finally caught up with the market on Monday.

For the complex, including gasoline, Monday’s biggest factor was a worry that the problems that pushed Ireland (and Greece before it) to ask for help could be part of a larger contagion that could touch a number of EU countries. This concern manifested itself as a stronger dollar, which led to selling in oil futures.

After weakening at the end of last week, the US dollar started this new week with a lower opening, which was followed by sideways movement until about 3 AM EST Monday morning. From that point forward, the dollar climbed steadily against the euro until trading subsided at about 2 PM. Prices weakened slightly after that, but moved predominantly sideways into the early evening.

Oil traders had gotten back into the habit of taking their cues on oil trading from the dollar and from equities. We had seen a sharp move lower in the greenback accompanied by a steep gain in the DJIA on Thursday last week, but those moves were unable to sustain themselves into Friday or this new week. For reasons that escape us, what had been the main factor in currency and equities trading – quantitative easing, or “QE2” – suddenly stopped being the leading feature in a number of markets just as soon as it became official policy.

It is normal to get trading ahead of an event, with the “buy the rumor, sell the fact” kind of counter-reaction once a policy becomes official. Still, QE2 involves the ongoing purchase of treasury instruments by the Fed, and there is still plenty of time before the program even starts to wind down. The Fed effectively left the door open for a continuation or increase in the purchases, should that be deemed useful, so this round of quantitative easing should have plenty of distance left in its “legs.”

And, as long as we are on the subject of anticipation of events and their actual arrival, last week’s biggest concern was that China might raise interest rates or increase banks’ reserve requirements. The Chinese central bank did raise reserve levels on Friday. Normally, that would have been seen as the fulfillment of that particular round of anticipation. More tightening could be coming, but it is not all that likely this week.

Perhaps, it is just as well to write this all off as pre-Thanksgiving randomness. When we started in this business, one of our mentors told us that no matter what position one took this week, it would find a way to lose money before the turkey was served. Eddie Murphy seemed to touch on that in “Trading Places,” when he talked about traders being more interested in buy the “GI Joe with the kung fu grip.” We know it was a throwaway line in a just-for-fun movie that could not even price Pork Bellies or FCOJ properly (in either correct increments or with any awareness of daily limits), but there was an element, a small kernel of truth. No one enters new positions this week and, with so many people getting out of positions, we tend to see some rather strange or just contrary moves.

This week’s DOE report will be out on Wednesday, at its normal time, and the EIA underground gas storage figure will come out then, as well, giving traders a couple of hours to trade before they go home or hit the road for grandmother’s house. We will not get a considered, lingering reaction.

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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.

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