Market Optimism Is Good for Oil

Includes: OIL, OLO, USL, USO
by: Wall Street Strategies

By Conley Turner

Optimism reigned supreme in recent trading sessions as market participants embraced a number of upbeat economic reports. This sentiment spilled over to oil traders and investors as they continued to take their cue from the broader equity markets. As a result, the price of oil pushed towards the upper end of its trading range.

Among the factors supportive of the upbeat mood was a recent report by the Department of Labor indicating that first time claims for jobless benefits declined to the lowest level in two months. The report noted that 451,000 first time claims were filed in the week ended August 28, and was down from the revised 478,000 recorded in the previous week. The consensus expectation was for 470,000 claims to have been filed. What the report conveyed was that the rate at which workers were being retrenched had slowed. The market in turn cheered as this occurred against the backdrop of an economy that had lost momentum and was at a heightened risk of undergoing a double dip recession.

There were concerns that the numbers may had been skewed as they were taken in a period during which many people were on vacation. Nonetheless, that perspective was trumped by what seemingly was an expression of pent up demand for good news. Investors appeared willing to embrace the positive after weeks of unrelenting negative economic news flow. The report at least provided some impetus for investors to at least tiptoe back into the market.

Another factor that influenced the price of oil was a news release by The Organization of Petroleum Exporting Countries (OPEC). The cartel issued a forecast for global oil demand growth at about one million barrels per day for the remainder of 2010. The projection took into consideration the phasing out of the various economic stimulus packages that had been implemented in oil consuming countries around the world. Furthermore, OPEC also indicated that it did not anticipate any spike in oil demand oil in the near term. The expectation is for aggregate demand to remain steady at about a million barrels a day into 2011.

Investors also focused on the September 9 weekly oil inventory report by the Energy Information Administration. Inventories declined by 1.9 million barrels in the previous week which was in line with market expectations. A similar report earlier in the week by the American Petroleum Institute showed a 7.3 million barrel decline in oil stocks for the previous month.

News out of Asia late in the week also had a positive impact on the price of the commodity. Data from China pointed to an increase in crude imports to that country. That was significant since a rise in oil imports signals an overall increase in economic activity and China is well positioned to be one of the principal drivers of future oil demand. Similarly, Japan raised its own growth estimates and this too portends increased future oil demand.

From a broader perspective, despite the week to week fluctuations in prices, the fact of the matter is that the supply of oil on the market remains very high. Current inventory levels are at the highest level seen in almost 30 years. With that, many observers contended that it will take something of a geopolitical incident or some significant exogenous event to move prices consistently higher.

An example of the impact of such an event occurred on September 10, when a pipeline that delivered oil from Canada to Midwest refineries was shut down due to the appearance of leaks. Approximately 670 thousand barrels of oil per day flowed through that pipeline and the fact it had to be taken offline sounded an alarm among oil traders and investors - the reason being that there was no clear timeline as to when it would have been back online, therefore sparking concerns about a rise in fuel prices in the region.

All in all, it is evident that oil is not likely to trade totally on its own fundamentals for the time being, but instead mimic the action in the broader equity markets.