Oil Prices Break Out

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by Conley Turner

The price of crude was trading higher at the start of the week despite broader market jitters about the debt crisis in Europe. Investors mulled the impact of the bailout of Ireland by the European Union (EU) and the International Monetary Fund (IMF), causing global stock markets to swoon. The dollar index gained against the euro as market participants sought out its safe haven status. Nonetheless, oil prices remained firm thereby suspending the inverse correlation between greenback and the commodity.

As the week progressed, investors felt a sense of trepidation about the possibility of sovereign debt contagion in the eurozone. Market participants worried that Portugal and even Spain would also require assistance with their debt obligations. As a result, the euro sold off to $1.2969, its lowest level in approximately 2 ½ months versus the dollar. Oil prices tracked the global equity markets lower as investors opted to lock in gains.

By midweek, the commodity had once again gained upside momentum in the wake of better than expected economic news out of China. The Chinese purchasing managers' index (PMI) rose to 55.2, up 0.5 percentage points from the October figure. This was also the highest level attained in seven months and underscored the health of that country's economy. The data seemed to point to the conclusion that China's appetite for oil remains strong and not likely to be satiated anytime soon. Investor's attention consequently shifted from Europe to Asia as the economic growth in China proved to be the catalyst for propelling stocks higher around the world.

Towards the back half of the week, the price of crude continued its upward trajectory. The move was boosted by the outlook that the European Central Bank was going to increase its efforts to support the eurozone economy. This served to allay some of the fears that prompted the earlier market turbulence. More importantly, the price surge was the result of renewed optimism regarding the state of the global economy. Crude oil for January delivery light, ended up at $87.87 which was the highest level in 2 years on that outlook.

This sentiment extended to end of the week following the release of the jobs report by the U.S. Labor Department. The data showed that nonfarm payrolls rose by 39,000 in November which was much less than was forecasted. The commodity followed the broader stock indexes lower in early trading but quickly bounced back into positive territory.

The fact of the matter is that the demand for oil is ramping up across the globe as economic activity increases. This outlook was underscored by The International Energy Agency, which has forecasted a pick up in energy demand over the next year.

At this juncture, the outlook for the price of oil to reach the psychologically important level of $90 per barrel is very much a foregone conclusion. In fact, prevailing expectations is for this to occur by the end of the year. Traders and investors are actually already looking to the next benchmark of $100 per barrel level to be attained by the end of 2011.

In the interim, the market is focusing on the upcoming meeting of OPEC on December 11 in Quito, Ecuador. The cartel currently controls over 40 percent of global output and decisions made there can have an impact on how soon the price of oil will reach those expected benchmarks.