Holy manufacturing smoke! The ISM blew away expectations and almost took oil out of its pre-Fed apathy by posting a 55.7% expansion which was the best since April 2006. The production index also soared to a five year high as well in a broad based recovery that transcended even the cash for clunkers program. That followed some strong numbers out of China as well.
Is it possible that the impact of the weak dollar is leading to a surge in US manufacturing of goods to countries that are eager to acquire goods that they can pay for with cheap US dollars? Could this mean that we will see job creation in that sector leading to a better than expected jobs number on Friday? Is the recovery more than smoke and mirrors? And if it is for real, does that mean the Fed policy of a federal funds rate at 0 to 1/4 percent for an extended period could be coming to an end?
Yet despite this and other strong economic data, oil seemed to rally somewhat reluctantly. Oil is still being controlled by larger macroeconomic forces and not just demand and demand expectations. The main concern is still all about what the Federal Reserve might do as they start their two day meeting. Will the Fed maintain its eternally low interest rates? Ok maybe not eternally low but a policy of federal funds rate at 0 to 1/4 percent for an extended period.
While the party line is that the market expects no changes out of the Fed and its statement overnight, oil is backing off as the dollar is coming roaring back after Australia's Reserve Bank raised its benchmark lending rate by a quarter percentage point to 3.5 percent. The second increase by Australia is raising speculation that the flood of global economic stimulus may be coming to an end. Whether or not that is true the dollar is getting a boost hitting the highest level since October off of those fears ahead of the Fed.
Does anyone in the oil patch care about the latest on Iran? The AFP reports that Iran's supreme leader Ayatollah Ali Khamenei said Tehran will reject any dialogue if its result is pre-determined by the U.S. This raises the possibility that the proposed nuclear fuel deal may be derailed.
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Buy December crude at 7427 - stop 7300.
Buy December RBOB at 18000 - stop 17800.
Buy December heating oil at 19500 - stop 19300.
We're long December natural gas from apprx 510 - stop 470.