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Oil Trading Update 23 Nov 2009

The oil trading complex has started the week strongly by pushing back up beyond Friday’s highs towards the $80 per barrel mark on the back of dollar weakness following comments from Fed Member James Bullard who said he would prefer to see the FED keep the asset buying programme active beyond its current cut-off date as this would give policymakers more flexibility towards economic recovery. Oil prices have also been boosted by stronger equity markets and ECB confirmation of a move towards a reduction of liquidity, unlike the US. Unless and until this difference of approach eases or disappears completely downside risk to the dollar will continue and upside risk to oil will remain, especially if gold continues to surge. The energy complex is also receiving support from an injection of geopolitical risk premium as a result of this weekend’s war games in Iran which appear related to its nuclear programme. In addition reports of a 4% drop in Iraqi exports from the previous month have also added support. Finally, and not least, Chinese imports are reported to have increased by 20% last month on a year on year basis. Meantime Brent has erased virtually all of its discount to WTI which can be considered an additional support to crude.

The release of a number of tier one economic reports during the next few days is also likely to step up volatility in the oil complex especially with month end and institutions and funds will be looking to adjust holdings following November’s sideways price action. The technical picture for crude has started to look bearing throughout November given the pattern of lower highs and lower lows, the sideways price consolidation and the inability of the complex to break and hold above $82.50. However, this has to be counterbalanced for the time being by negative sentiment towards the US dollar, in particular against the Euro which is making another determined effort to break and hold above 1.50 – although the key level is actually 1.5050 – which will make oil attractive both as an asset class and hedge against a falling dollar.

In recent weeks the December WTI contract declined into the $75-$76 zone and with the January WTI making its debut today the strong resistance in the $80-$82 price band will come into play once again. You can keep up to date with my daily WTI price analysis at the main oil blog.

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