GETTING REAL

There has been fairly good follow on selling with the breach of $80. In fact the market appears ready to drop below $79. The results of the FOMC meeting confirmed the weakness of the US economy, which prompted an expansion for the quantitative easing policy in the form of using investments and mortgage money to purchase government debt; in effect adding liquidity to the system.

Of course there will be objections that it will cause hyper-inflation down the road, but also implying a deflationary fear near term. The IEA raised its 2011 demand forecast by 50k bpd while noting “significant downside risks” to consumption.

Clearly another example of policy maker's legerdemain. Also weighing on oil prices was the report that China's industrial output grew the least in 11 months and U.S. data showed worker productivity dropped in Q2.

EIA is expected to releases a bearish stockpile report later today as well. As statistics measuring correlative relationships fall and fundamentals come more into focus it would suggest that there is less real support for oil prices than recent valuations would imply. Guess what that means for prices? You got it!

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