CALM DOWN!

Energy was one of the commodities that fell sharply yesterday as investors sought to eliminate risk due to heightened anxiety in the financial sector  and escalating concerns that the economy was sliding into a recession.

Equities have moved higher overnight and so have oil prices as the panic mentality seems to be receding a bit. The turmoil in financial markets seems to have once again made investors a bit more sensitive to the demand outlook for oil and that may push supply issues, at least temporarily, to the sidelines.

The weak dollar has been a critical factor drawing in huge amounts of speculative investment into the energy complex, as a hedge against inflation and that can only continue if the Federal Reserve drops rates by as much as a full point later today.

This flow of funds was temporarily reversed to a certain extent on Monday, but continued dollar weakness, which will become more pronounced as interest rates fall, will consequently be supportive for energy prices.

Conversely,  if sentiment takes hold that macro economic conditions are worsening and that global oil demand may be threatened by a US led economic contagion, then prices may break below the $100 price level.

However, the market's ability in the past to quickly discount negative news must be respected. Actually, if the Fed cuts interest rates aggressively today and a measure of calm returns to financial markets, then prices may  be able to snap right back toward recent highs, despite the lower than expected housing starts and higher than expected PPI reported earlier this morning. The pull of these opposite forces though, will keep volatility very high for some time to come.
                
M. Fitzpatrick