Oil prices decoupled themselves yesterday from the 30 second news snippets associated with the US fiscal cliff negotiations and rather were driven by the prospects for slow economic growth and a growing surplus of oil. This week's EIA oil inventory report was biased to the bearish side after a huge increase in gasoline stocks and an atypically large build in distillate fuel inventories during a period when the weather was relatively cold. It is not very often that current fundamentals have such a near term impact on the price of oil. However, at the moment the fact that there is ample supply of oil around the world coupled with the global economy not looking like it is heading into an oil demand growth spurt anytime soon is keeping the selling pressure on prices this week. At the moment it looks like oil prices will experience their first weekly loss in five weeks.

From a technical perspective the upward trading channel that has been in play since the first week of November was breached to the downside yesterday suggesting that lower prices are now more likely. The spot Nymex WTI contract now has the potential to test the next level of support at around the $84/bbl level with the aforementioned channel tend support now a resistance point at about $87.50/bbl. The spot Brent contract has performed mostly in sync with the spot WTI contract having also breached its upside trending channel to the downside. The new resistance for Brent is around the $109.50/bbl level with support not found until $104.80/bbl. Refined products markets are also breaking down and as such from a technical viewpoint oil is now biased to the downside.

The geopolitics of the middle east are continuing to evolve with protests still occurring in Egypt while the civil was in Syria rages on. Talks of chemical weapons in Syria has elevated the risk of spreading and/or involvement from the west. On the Iranian front the US is likely to extend the exemption to several nations (India, Turkey, etc.) from Iranian financial sanctions for another six months as they all reduced purchases of crude oil from Iran over the last six months.

Oil exports from Iran are about half of what they were in the beginning of the year. From that perspective the sanctions are working as they have resulted in a lowering of Iran's main revenue stream. That said Iran remains defiant and seemingly not overly anxious to enter into any meaningful negotiations with the west. So for now the stand-off continues. The overall geopolitical risk to oil supply has not been elevated and as such geopolitics are currently playing a secondary role as an oil price driver. The fragile situation in the Middle East is now serving more as a floor in oil prices rather than an upward price mover.

The global economy is still struggling. The US fiscal cliff negotiations continue but as I have been indicating they will make a deal in the next three weeks...possibly even before the Christmas holiday. The financial markets seem to be building in that viewpoint into the value of equities. Today the always important US nonfarm payroll data will be released. Wednesday the ADP private sector payroll number came in as expected around 118,000 new jobs and yesterday the weekly initial jobless claims dropped. Today the market is looking for the US nonfarm data to show an increase of 90,000 new jobs with the unemployment rate coming in at 8%. I am not certain this report is going to be much of a market mover in either direction as many market participants may discount the results as the numbers were likely impacted by Hurricane Sandy.

Today the Bundesbank cuts its forecast for expansion in Germany by about 1.2% for 2013 as the euro zone remains solidly in its second recession in the last four years. The Bundesbank is projecting growth at 0.4% compared to 1.6% suggested in its June forecast. It also said the German economy will grow 0.7% in 2012 down from its June forecast of 1%. Still positive growth but like many other places around the globe growth is sluggish and slow. The ECB also lowered their forecast for the region yesterday as they kept short term interest rates unchanged. The ECB is forecasting a 0.5% contraction in 2012 as well as a 0.3% contraction for 2013. They are not expecting the euro zone to emerge out of recession and move solidly back into a positive growth pattern until 2014... but not by much as they are projecting a 1.4% growth rate in 2014. This all translates to a slowing in oil demand growth as both are highly correlated.

Although oil looks to be heading for a weekly loss global equity markets are currently setting up for their third weekly gain in a row as shown in the EMI Global Equity Index table below. The EMI Index was about unchanged over the last twenty four hours bolstered by gains in Australia and China offsetting small losses in the western bourses. The Index is currently showing a weekly gain of 0.5% resulting in the year to date gain holding at 7.3%. The Index is trading at levels not seen since the middle of October and above the sell-off levels shortly after the US Presidential election.

China remains the only bourse still in negative territory for the year and unless there is a sustained rally in Chinese equities it looks like this is likely to be the second year in row of losses for China. In spite of the downgrading in the growth rates for Germany discussed above the German bourses remains the best performing market in the Index showing a year to date gain of 27.5%. Global equities have been a slight positive for oil prices this week... although as discussed above oil prices are currently being mostly driven by the growing bearish fundamental picture.

I am changing my view and bias to cautiously bearish as the fundamentals are now biased to the bearish side as well as the technicals. At the moment there is still no shortage of oil anyplace in the world and a portion of the risk premium from the evolving geopolitics of the Middle East is continuing to slowly recede from the price of oil. In the short term the price of oil is still very susceptible to sudden price moves based the 30 second news snippets. However, the fundamentals, the markets view of the global economy, the US fiscal cliff negotiations and less so the geopolitics will be the price drivers in the short term pretty much in that order. This is still an event driven market for oil at the moment.

I am maintaining my Nat Gas price direction at cautiously bearish as the fundamentals and technicals are still suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to test the lower end of the trading range... even after this week's bullish inventory snapshot. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are in the early stages of the winter heating season and currently those forecasts are all still mostly bearish.

Markets are mostly higher lower into the US trading session as shown in the following table.

Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.


View All Market Commentary

*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.

Copyright CME Group All rights reserved.