BUY-SLIDE ECONOMICS                                        

With the outlook for the US economy deteriorating, concerns toward the US financial sector escalating and the US stock market under ongoing pressure, energy prices, at some point had to be affected.

With the internal fundamentals for crude oil turning more negative, a more significant price correction is certainly justified.

But it is hard to gauge whether the market will see any significant downside follow through, since the factors that have been supporting crude oil prices, including the weak dollar, geopolitics and fund buying off inflation fears, haven't really changed that much.

In fact, energy markets have bounced over night ahead of today's inventory report simply because OPEC decided to leave policy unchanged!

None of the recent geopolitical developments have significantly impaired oil supply flows, while the sharp rise in crude oil stocks over the last seven weeks has left the market well supplied.

Certainly if stockpiles rise by 2.5MM bbls. or more in today's inventory report it may justify further selling.  However, if this break back from the highs in April crude oil doesn't attract aggressive new speculative buying, it could be a sign the market is becoming less concerned over near term supply issues and that sentiment is beginning to shift away from the 'buy at any price' fervor.

Today's price action could be pivotal in determining the bull's resolve. If overnight gains do not hold the sentiment pendulum could be starting to swing back towards economic weakness.

Participants will begin to  question whether crude oil around $100/bbl. is justified in an environment of rising US oil stocks and weakening demand. We never thought so, we still don't.
                
M. Fitzpatrick