PARIS (ResourceInvestor.com) -- As if we did not need it explaining, here is a personal story from this columnist about the vagaries of the oil market. A number crunching analyst was talking near me this week at my place of work saying “how incredibly clever some people were.”
This cruncher often exclaims at the top of his voice, as if some kind of major market fracture has taken place, sitting at his computer going “oh my God!” Normally it transpires that the crack spread between Dubai and Brent has moved 2 cents in the direction he did not expect. Everyone else smiles nicely – he is a senior fellow – and gets on with their work.
But as the Nymex WTI hit $62 earlier in the week, as the contracts changed over from month to month, our cruncher recounted this tale he had been told from a wise trader. The wise trader told the cruncher earlier in the week that all that was needed to send crude oil prices higher again, was a draw down in U.S. products, gasoline or heating oils being the most obvious.
When the U.S. inventories came out this week there was indeed a 12.8 million barrel fall in products relative to the five year average. However this was not really the reason that the Nymex bumped up to $62. It was, as I had pointed out to the cruncher, the contract change-over, where the expensive front month, November, had pulled up the cheaper ending contract, October.
So I sat, forced to listen to our cruncher’s pearls of pseudo-wisdom about how the market was about to set off once again on another bullish run. It did not. In fact, the Nymex then went in the opposite direction breaking down intraday below the target price we have been talking about for a few weeks, $57.50, hitting $57.45. Not unsurprisingly this was as low as it got, putting in a mild rebound back up to $58 and beyond.
Our cruncher and his “wise” trader friend were wrong.
The basic gist of the market right now is bearish, but it does not make sense. That does not matter, the sentiment is there. We have a worsening geo-political situation that we have gone over before in some detail, non-OPEC supply is wobbly at best, OPEC are threatening to cut supplies – and already have in fact - whilst demand from the United States for the first 12 days of October is up 4.8% year on year. The fall does not make sense.
On the bear side we are in the slackest period of the year traditionally, the hurricanes really did not turn up and we are approaching the mid-term elections in the United States.
The balance is not there, the bullish side of the equation weighs heavier. But the key to all this may be the U.S. mid-terms. Very often to change sentiment in a market you need a specific event. Attention needs to be focussed on that event, for example the Israeli invasion of Lebanon – whose airborne mines are still killing and maiming civilians in the south of the country.
When the attention of the world is focussed on a subject that also encompasses oil in some way then the market does what our number cruncher does. It takes on board perceived wisdom. It takes on the ideas of the incredibly wise. Or in this case the American public.
Let us wait for the start of November, because what we may well be witnessing now is the same kind of effect we normally get at a Presidential election, just in a smaller dose. There is uncertainty which the market does not like, but admittedly the reality may not matter as much.
With the Dow Jones powering on like there is no tomorrow and the U.S. economy still robust the mid-terms may not make much of an actual difference, it just might provide the market makers with a chance to prove their value. To gather their thoughts, compare notes and send the price of oil higher once more.
