PEACE-ING IT TOGETHER                                     

Considering the very soft jobs number on Friday and the subsequent drop in energy prices, it should be no surprise to see prices pull back further overnight.

The sliding dollar and the flocking of speculative interersts towards energy as an inflation hedge have been key factors propelling the rally's recent leg higher.

This was confirmed by the most recent Commitments report which shows a significant combined net long fund and spec position. Actually, this was probably even understated, since the market rallied about $6/bbl from the level where the report was measured and so, the market has become technically overbought.

It is a little difficult to comprehend the market's reaction to OPEC leaving production rates unchanged. First, because no one actually thought there would be a contraction with prices over $100, and second because stocks have seen a net build of 22.6MM bbls over the last eight weeks, which leaves the market fairly well supplied.

Participants continues to display more supply than demand sensitivity because it has only marginally been impacted by the decline in February payrolls, which certainly seems to push the US economy closer to a recession.

How long energy markets can continue to discount the bearish demand environment? Perhaps seeing China's Feb crude oil imports up 14.3% compared to year ago and at a record high, is helping to keep the global demand outlook for oil fairly strong.

An escalation in South American political tensions last week also kept market anxiety levels high, but with the dispute between Colombia, Ecuador and Venezuela subsiding, we suspect part of the related risk premium iis starting to be extracted from prices, as well.

Given the market's overbought technical condition we certainly can't rule out a break in April crude oil back towards and perhaps under $100. However, the bull trend may not fully capitulate until it is confirmed the dollar  has found a bottom.         

J. Kilduff