AS we indicated yesterday the inventories had little impact on the market. In fact the response from the marketplace was bullish in light of a neutral at best inventory report. The net result is oil made new highs once again. Actually we have seen new highs in the oil complex everyday this week so far. The market sentiment remains very bullish and the pattern of buying any dips has been the optimum strategy over the last several months.

The main drivers remain the upcoming refining strike in Scotland that is scheduled for Sunday. Normally a refinery strike is bearish for oil and bullish for refined products. In this case the problem is the huge 700,000 bpd Forties crude oil field gets its utilities from the refinery (steam, etc). The lack of the utilities will likely result in shutting in the Forties field for the length of the strike. This on top of the evolving situation in Nigeria and the Middle East continues to raise concerns that supply will be an issue.

Fortunately supply is not an issue and does not seem likely to be a problem anytime soon. This is especially true for gasoline. Even though gasoline stocks declined for the 6th week in a row (normal for this time of the year) inventories still remain over 18 million barrels above last year at this time. With most projecting a decline in gasoline consumption this year it is unlikely there will be any supply problems with gasoline as we enter the summer driving season. In fact gasoline is extremely over-valued based on its fundamentals and very susceptible to a significant downside price correction at any time.

The US dollar is also still maintain its hold on commodities and in particular the oil complex. The dollar has firmed a bit over the last few days, especially in relationship to the Yen. With the Fed ready to meet next week with another a rate cut most likely to be the outcome of the meeting the dollar has begun to show some very early signs of a bit of short covering since another rate cut is already priced into the market. How deep this turns out to be or if it in fact is truly a short covering rally at all is still up in the air. However, many economist are starting to think this could be the last rate cut until the fall. If so the dollar could be hit with a strong round of short covering with selling in oil and other commodities as the result.

While many in the market view oil as over-valued and out of sync with the fundamentals the investment flow into oil and other commodities continues and will continue until the US dollar gains its sea legs and begins to firm consistently, not just one day out of the week. For now the dollar trend is still downward but the downtrend is weakening. Stay tuned and remain buckled up as new highs in the oil complex are likely before we see a substantial correction to the downside.

Currently prices are retracing as the dollar firms a bit in overnight trading.




Dominick A. Chirichella
Energy Management Institute
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