Market Report: Oil's Upside May Be Limited in Larger Picture

The driving force in energy yesterday really was the Chinese manufacturing numbers which last month showed the greatest growth in 5 years. The surge there offset the less than stellar ISM number here in the US and really seemed to be the main factor keeping oil moving. Yet it is hard to dismiss the larger macroeconomic picture along with some geo-political (Iran) related buying that seems to give oil its upside bias. Yet despite all the forces driving oil higher, the market still is back in its old trading range and its upside prospects should be somewhat limited.

Last night's weekly energy stocks report from the American Petroleum Institute is one of the factors that will keep oil grounded. The API reported larger than expected increase in supplies across the board reflecting weak US demand. The API reported that crude supplies increased by 2.89 million barrels, gasoline supplies up by a shocking 3.42 million barrels and distillates up by 1.06 million barrels. These numbers show quite clearly that not all is well on the economic recovery front and many businesses and other sectors of the economy is struggling. That may be one reason why the US manufacturing data seemed to disappoint. We are going back in the wrong direction and this is a warning sign that things in the economy may be getting ready to take a turn for the worse.

Of course the stock market does not care and why should it. That plays into the cheap money scenario that has driven us on this latest run. Why worry about the future when there is no talk of exit strategies and money is cheap. Borrow money at negative interest rates, buy stocks for return and it is a win-win. That is of course until we get signs that the game is coming to an end. Right now it does not look to be anytime soon.

Strong data out of China and the high price of oil has inspired OPEC to increase production to the highest level since December 2008. Bloomberg News reports that OPEC output averaged 28.9 million barrels a day last month, up 110,000 barrels from October, according to the survey of oil companies, producers and analysts. Iraq, the only OPEC member without an output quota, was the only member to cut production. Countries with quotas pumped 26.5 million barrels a day, 1.655 million above their target. OPEC cut output quotas by 4.2 million barrels to 24.845 million barrels a day last year as fuel demand tumbled during the worst global recession since World War II. The group, which left the targets unchanged at a Sept. 9 meeting in Vienna, is set to gather again on Dec. 22 in Luanda, Angola. Dow Jones reports that Saudi Arabian Oil Co., or Saudi Aramco, will do its part to keep oil prices from rising excessively and thus damaging a nascent global economic recovery quoting Chief Executive Khalid Al Falih. Al Falih told reporters in Seoul he expects the refining industry to remain weak into next year, although signs of a recovery are appearing. While declining to provide a forecast for oil prices next year, he said large oil companies like Saudi Aramco need to have enough spare capacity for global oil prices to stabilize at an "appropriate" level. Saudi Aramco recently completed the expansion of its output capacity to 12 million barrels a day, which will help stabilize oil prices, he added.

At the same Time Dow Jones reports that Qatar's oil minister said early this month the Organization of Petroleum Exporting Countries will keep output quotas unchanged at its Dec. 22 meeting in Angola, despite fears that Dubai's debt crisis could weigh on the global recovery. Al Falih said the Dubai crisis won't affect Saudi Arabia, as the country's financial and property markets are "strong." He added the crisis won't spread globally because Dubai is "seriously" trying to solve the debt problem.