A BLAST FROM THE PAST

A weaker dollar and a bullish inventory report resulted in an explosive move higher  yesterday. While the dollar has bounced overnight, crude oil prices have experienced an early move up on news that for the first time since 2004, the Basra supply route has been disrupted by sabotage.

The resulting blaze was quickly extinguished and officials said efforts were under way to get shipments back to normal. The combination of a weaker trending dollar and tightening supply are a potent force driving investors back to the market, but any further indicators of sagging oil demand will be hard to ignore. 

Since oil supplies appear to be coming more important than oil demand, this sentiment certainly gives an advantage to the bull camp. According to the Commerce Department, corporate profits fell 3.3% in Q4, and U.S. economic growth slowed to a meager annual pace of 0.6% in same period.

Yesterday's inventory report held several bullish surprises, but the sharp drop in product stocks is due to refiners cutting back production. If it wasn't  for a sharp decline in oil imports, stocks would have been up a lot more than only the 88k bbls. Strike related oil disruptions in West Africa and France and escalating fighting in southern Iraq damaging oil export flows is also providing a layer of geopolitical support to prices. But the dollar's gyrations still must be viewed as the motivation behind the bull camp regaining their grip. Expectations of a near-term interest rate cut in Europe, which would relieve pressure on the dollar, have probably been dashed by high German and French business confidence surveys and continued hawkish rhetoric from the European Central Bank.  ECB President Jean-Claude Trichet said on Wednesday euro zone rates were at the right level and stressed inflation risks.

Despite gathering signs of an economic setback in the US, a weaker dollar, tightening stockpiles and fresh geopolitical risk will feed right into a buy on dips mentality.                    

M. Fitzpatrick