A CUT BELOW

The market probably can not sustain prices at much higher levels, unless a  more optimistic economic outlook takes hold, the anxiety in capital markets calms down, or the dollar makes another leg lower.

The Fed move, yesterday, appears to have struck a delicate balance between easy and tight monetary policy. By not throwing in the towel with a full percentage point rate reduction, a level of economic contraction may be tolerated in the overall reordering of the markets.

In such an environment, it will be difficult to justify crude oil prices significantly above $100/bbl level. With both CPI and PPI coming in below expectations, the dollar stabilizing a bit, and, if the ECB joins the Bank of England in cutting rates, all this could combine to weigh heavily on energy prices, despite recent investment flows.

As the price action Monday and Tuesday showed, those funds can move in and out of markets very rapidly. Monday's sell off demonstrated the market's vulnerability to demand conditions and shows that fundamentals can still influence prices.

Today's inventory report may test the bull's resolve, because ultimately it could be seen as another measurement of contracting demand. Lower profit margins on refined products will keep refinery runs low as evidenced by recent movements in the crack spreads.

It has been very difficult to stand in the way of the upward trend in energy prices of late, and bullish sentiment is still widely held. A price dip off the inventory report might attract fresh buyers, and an unexpected drop in crude oil stocks could be enough of a surprise to get the bulls stampeding again, as well.

It is hard not to get a sense though that prices are finding it increasingly more difficult to hold up above the $108 level. To significantly undermine the market, another wave of anxiety in the financial sector or a sharp rebound in the dollar may be required.            

J. Kilduff