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Give and Take

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Tuesday's move in oil was impressive. Crude gained about 10% thanks to a drop in the U.S. dollar and news of significant productions cuts from key OPEC members. After two weeks of consolidating sideways in the $63-70 zone it looks like oil might finally breakout and see a trend change upward. Have we seen the low in oil?

There has been plenty of discussion about the global recession we're quickly sliding into. Yet last summer's $147 a barrel oil prices haven't been given a lot of credit for the economic slowdown. One analyst, Jeff Rubin, at CIBC World Markets is voicing his opinion that oil is the culprit. Rubin believes that high oil prices were responsible for four out of the last five global recessions. It's true that the financial crisis is a major impact on the world economy but the summer's record high oil prices were also a significant factor.

Now that oil futures have been cut in half it could go a long way to lessen the sting of this recession. Consumers will have a lot more spending power than they had just a few months ago. It looks like consumers are already adjusting. As we reported earlier the latest Mastercard spending pulse survey showed a 1.3% jump in gasoline demand for the week. Overall demand is still down but with gasoline down to $2.00 a gallon (or less in some states) there could be a sizeable bounce for oil demand.

It has also been suggested that countries like China and the U.S. should take advantage of this "cheap" oil to rebuild their strategic reserves. If those countries rich enough to have an oil reserve start replenishing their stock how long will oil remain in the $60s?

Wednesday morning brings the latest inventory numbers from the U.S. Energy Department. Estimates are for a build in crude oil supplies to almost 312 million barrels. This report, due out around 10:35 a.m. EST, could put a little pressure on oil prices.

After a 10% one-day spike we have to expect some give and take. Oil futures are already trending lower as traders take profits following Tuesday's big move. As of Wednesday morning, November 5th, oil was down about 3% to $68.45 a barrel.

Meanwhile Asian markets were up following the U.S. elections that saw Barack Obama claim the presidency. The Japanese NIKKEI was up about 2.5%. Hong Kong's Hang Seng index was stronger with a 5.7% gain. U.S. markets could easily see a post-election bounce on Wednesday morning but after six-day, 1500-point rebound in the Dow Jones Industrials I wouldn't bet on the market holding too many gains heading into Wednesday's closing bell. Sell the news, anyone?

Jim Brown

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