NO CHAMPAGNE YET

Prices reached the bottom, of the trading band we called for yesterday at 74.86. Still, despite a strong rebound in overnight markets, volume is low and participants seem momentarily satisfied with the precarious equilibrium the market has struck; at least until PPI and inventory data.

EIA will probably report tomorrow that crude stocks dropped, but fuel demand may have dropped further. With the driving season approaching its conclusion it’s unlikely to see strong demand for the fuel. Distillate demand is closely linked to industrial output so with economic recovery moderating, distillate consumption is bound to be disappointing.

Strangely, while housing starts increased less than forecast and building permits fell to their lowest level in a year, the market has held on to overnight gains, suggesting a change in psychology from last week.

A few  positive economic reports or a surprise tomorrow, coupled with low seasonal volume, could put prices right back up near the top of our range of $75-$78. This does not imply though that we have changed our mind on the economy or oil prices; both remain fragile and should continue to be so for some time.

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