LET THE CIRCLE BE UNBROKEN

The undeniably bullish inventory report yesterday combined with a weak dollar to provide a lift to the whole energy complex which has continued  overnight.

Supply concerns continue to dominate, despite worsening economic performance and consequent evidence of softening demand. An upward revision in China's GPD for last year to nearly 12% is helping to keep the global demand outlook for oil fairly positive.

Participants were shocked by the 3.1MM bbl decline in crude oil stocks, since a rise was expected and the sharp decline in imports and rise in refinery runs certainly helped to tighten the supply picture for the market.

The market will periodically be bothered by demand concerns but the decline in crude oil was so unexpected that it seems for now to have aleviated those worries. The squeeze in the distillate market has created a tight supply environment across the energy complex and that has been another factor driving crude oil prices higher.

With OPEC unwilling to raise production, the supply could stay tight this spring due to US and foreign refinery glitches, seasonal maintenance and a low operating rate. Certainly a portion, probably a good portion, of yesterday's gains must be blamed on the continuing pressure on the dollar.

The very real possibility of further interest rate cuts by the US Federal Reserve, and the ECB's decision to leave rates unchanged today will exert further pressure on the greenback, and that seems to be sparking buying across a variety of physical commodity markets.

If expectations hold for the Fed to cut rates aggressively again and the buck continues to slide, speculative interests will continue to buy as an inflation hedge.

The trend is up and sentiment is strongly bullish but, as we have been saying, momentum alone will not keep prices advancing forever.                

M. Fitzpatrick