INFLATE EXPECTATIONS

This morning,  the Labor Department posted a 1% rise in producer prices, the biggest 12-month gain in more than 26 years. Core producer prices, which strip out volatile energy and food costs, jumped a greater-than-forecast 0.4%.

Adding to upward pressure on prices, the attraction of speculative interests to commodities has intensified, as global stock and bond markets continue to struggle.

The recent cold temperatures and subsequent increase in winter fuel demand may continue to provide a measure of support to the complex, until temperatures start warming up.

European market participants, in particular, seem to be focused on tight distillate supplies. Lingering geopolitical jitters tied to Turkey's deep incursion into Iraq, Iran's nuclear program, Exxon's rift with Venezuela and the potential for violence in Nigeria all continue to prop up prices.

Specifically, yesterday, fog delays at the Houston Ship Channel added to the bullish environment. The idea that OPEC will cut back Q2 supplies, even though official production levels are likely to be left unchanged at the March 5th meeting is being repeatedly mentioned as another rationale for rising prices.

In fact, Petrologistics expects OPEC's oil exports to decline this month, due to lower output from Saudi Arabia and Iran. Participants are expecting crude oil stocks to see another sizable gain for a 7th straight week on Wednesday, and that is probably holding back prices somewhat in overnight trading .

If today's data on consumer sentiment and manufacturing disappoint, it could leave the outlook for the US economy and oil demand with a decided downside bias.

We still remain skeptical the market will be able to hold up near the $100 price level, unless a more direct supply threat arises. Inflationary pressures, which are clearly ripping through the commodity sector, are the main countervailing factor to this view.
                                     
J. Kilduff