QE3 is the main price driver

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Although Wednesday's inventory report was the main event for the oil market yesterday with prices trading around this report the main event for the global risk asset markets today was the US Fed announcement that they are embarking on another round of quantitative easing... QE3. The US Fed announced a $40 billion per month mortgage back securities buying program that is likely to last for as much as a year. The Fed will re-evaluate the situation in three or four months. This new program is in addition to Operation Twist which will also continue. The Fed is shooting with both barrels as it tries to attack the malaise in the economy as well as the faltering jobs market.

The market has been anticipating this event and so far the market has reacted positively to the announcement as just about every risk asset market in the world is trading above where it was prior to the announcement... including WTI but not refined products which ended the session in negative territory and got no Bernanke QE3 boost. I am not sure crude oil and other risk asset markets are going to go straight up from here. The market has been in a strong uptrend for the last week or so in anticipation of QE and now that it is here I am still expecting a bit of sell the news event in the short term. When that event comes I suspect it may be a good opportunity to then set fresh longs in oil and other traditional assets including oil.

Global equities certainly got a QE3 boost during the US trading session as shown in the EMI Global Equity Index table below. Asia and Europe have yet to have the opportunity to trade with the benefit of knowing the outcome of the Fed 's new program. As such I would expect to see some follow through buying at least through the Asian session. The Index is now higher by 3.4% for the week resulting in the year to date gain widening to 8.7%. Equities are a direct recipient of more easing from the US and as such are also a positive price driver for oil and the broader commodity complex.

I still think the oil price is overvalued and toppy at current levels as it approaches a key technical resistance area. WTI is still currently in a $90 to $100/bbl trading range while Brent is in a $110 to $120 trading range. That said prices are almost solely being driven in the short term by a combination of last week's outcome of the ECB meeting and the growing view that more stimulus from both China and the US is on the way.

I am keeping my view at neutral as the industry is already almost back to normal operations after Isaac. At current prices the economics still favor Nat Gas but if prices do work their way to the upper end of the trading range utilities could begin to move back to coal.

Markets ended the US session mixed as shown in the following table.

Dominick
Dominick
Best regards,
Dominick A. Chirichella
dchirichella@mailaec.com
Follow my intraday comments on Twitter @dacenergy.

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