Oil Consolidating Before the Next Move Up

Includes: OIL, USO
by: Wall Street Strategies

By Conley Turner

At the beginning of the week, the price of crude oil was rising in the wake of comments made by Federal Reserve Chairman, Ben Bernanke. The head of the US central bank indicated over the previous weekend that an increase in bond purchases is a possibility should it be deemed necessary to provide support for the domestic economy. The commodity had already been on a tear over the past few weeks as oil traders and investors were subscribing to a more optimistic outlook for the global economy.

Also providing support for oil prices was the fact that frigid temperatures in the Northeastern section of the US prompted an increase in demand for the commodity. This region is historically the country's largest consumer of heating oil. As a result, by Tuesday oil prices finally broke above the psychologically important $90 per barrel level for the first time since October of 2008.

This gain was fleeting however as by midweek, market participants opted to lock in profits thereby causing the price to retreat. A confluence of factors accounted for the move including the sovereign debt crisis in Europe. Investors were spooked into selling the euro and alternately buying the dollar in light of its safe haven status. Oil and other commodities are priced in dollars and are typically inversely correlated.

Additionally, the broader market became rattled by renewed fears of China raising interest rates in order to temper the robust rate of its economic growth. That country is an integral component the global economy and the reverberations of any slowdown there will likely be felt way beyond its borders.

By midweek, US government data released by the Energy Information Administration showed a 3.8 million barrel decrease in oil inventories. The drawdown superseded the market expectation of a decline of 1.2 million barrels. However, this seemingly positive report was mitigated by the fact that there was also an increase in gasoline and distillate supplies including heating oil. The commodity continued to oscillate around the $88 per barrel level towards back half of the week in the absence of any immediate upside catalyst.

At this juncture however, the price of commodity has little in the way of resistance to the $100 per barrel level. Current market expectations point to this price being attained by the 2011 second quarter as a reflection of the improving state of the global economic recovery and prevailing market expectations.

At week's end, attention turned to the next OPEC meeting in Ecuador. The market expectation was for no action to occur that will meaningfully interrupt the income that member states were generating from current crude oil prices. Overall, it is likely that the global economy is doing a lot better than the current headlines are suggesting and a significant increase in demand will occur in the not too distant future.

Disclosure: No positions