Oil Dips Below $70, Weak Economic Data, Fundamental Shift the Culprits

Despite an eight-month high in overnight trading, oil crude dipped again below $70 on the New York Mercantile Exchange Tuesday. Based on weak economic statistics reported in the US and UK, as well as the close of the quarter, crude oil dropped alongside the stock market and other commodities today.

Overnight trading saw a high of $73.38, but on the NYMEX Tuesday crude oil settled at $69.89 a barrel, which is a more than $2 drop from Monday's close.

Obvious factors in the decrease in the price of oil include the report from the US Conference Board that consumer confidence dropped, and the UK came out with dismal economic numbers for the first quarter of 2009. Additionally, the stock market dropped today, and the US dollar gained strength.

"In one sense, the activity that we've seen in consumer confidence probably means that the recession ended maybe last month or the month before," revealed Bill O'Grady, the chief markets strategist at St. Louis-based Confluence Investment Management LLC, an investment advisory and management firm. "But in the 1991 recovery, we saw very choppy activity and consumer confidence, primarily because the labor markets took a long time to recover. I suspect that is what we are going to see this go-around.

"That being said, when the consumer confidence numbers came out, they were negative," he continued. "It put a damper on the stock market. The stock market prices fell, the dollar rallied, and oil reversed. In fact, all of the commodities reversed. Gold went down. The only commodity that went up today significantly was livestock."

'The Evolution of the Commodities as an Asset Class'

Additionally, O'Grady advised that fundamentals in the crude oil market have changed as the commodity has become an attractive asset to purchase to hedge against inflation. The analyst said that today's fall in the price of oil was a part of the "evolution of the commodities as an asset class."

"In the old days, we didn't worry about things like the end of quarter because in the commodity business we weren't really driven by quarter end or mid-year end, we were driven by what season in the year is it, what's the temperature doing, is it snowing, is it raining," O'Grady explained. "Now we still have to worry about those things, but we also have to worry about the shifts that you see in the financial market. Today represents the end of the quarter, and today I think you had a lot of window dressing from a lot of fund managers trying to figure out what kind of stocks do I want to own, what kind of bonds do I want to own and, invariably, what proportion of commodities do I want to have in my portfolio."

Despite somewhat bullish news circulating, including production shut-downs in Nigeria, O'Grady said that the market was ultimately brought down by negative economic data and the plummeting stock market.

"I think today, that the biggest issue was: We opened stronger, and as the stock market dropped on the weak economic data, it took the whole commodity complex with it," he said.

Crude Contango Narrowing

With API numbers revealing that there is a draw in crude oil of about 6.7 million, as well as an increase in gasoline stocks and distillate stocks, the contango present in the crude market seems to be narrowing.

"As the contango narrows, we're beginning to see inventory liquidation of crude oil," said O'Grady. "It doesn't necessarily mean things are getting bullish; it just means it's less attractive to store oil. So you're starting to see holders of this particular product start to reduce their stockpiles because they're not getting compensated as much for holding it."

Recession Easing, Risk for Another

O'Grady confirmed that the country is recovering from the economic recession, but warns of another recession occurring in 12 to 18 months from now. He warns that the Obama administration will try to correct the level of deficit the country has taken on and tighten policy prematurely.

"My hunch is that's probably nothing we have to worry about in the next 12 months, maybe the next 18, but somewhere between this time next year and January 2011, there is risk that we'll see another downturn," O'Grady said. "I think that to some extent that is what has been reflected in international energy agencies' pretty significant downcast in demand forecasts for the next five years. I think they are reflecting the fact that the global recovery we're going to see is going to be slow. It's also going to be choppy because a lot of the recovery is based on government spending, which, because it's tied to the political process, tends to be unstable."


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