Crude Oil- 20th october

Oil’s aspirations of breaking out of the 70-80 range received a
serious setback yesterday-thanks to the Chinese rate hike. Oil was
riding high on a weak dollar and it looked that it might break out to
the upside this time as inventory position was also a little better
this time when compared to the last times when it rallied to these
levels; but it was not to be. Prices came down close to 400 ticks
before closing out near day lows. Products also displayed considerable
weakness.
What went strong was US Dollar. The rate hike by Chinese was perceived
as a positive sign for the US economy because the rate hike would
strengthen the Chinese Yuan and this would make Chinese exports less
competitive in the US markets. Demand for US products would return and
so the weak US manufacturing sector would ramp up capacity and dole
out jobs to unemployed US citizens. This was the logical flow of
“could be(s)” that sprang out of the Chinese rate hike. Rumours ran
wild that US might have reached a tacit agreement with China on
currency matters and it might go slow on the impending QE2.
Commodities came down steeply on Dollar rise. Oil and Gold had big
falls. Also to fall was Australian Dollar which gains support from
stronger commodities. The trend might continue as a rate hike means
China understands that its economy is overheated and is ready to grow
slow. Experts say that China might need more such hikes if it wants to
avoid a bubble in its economy.
But there are serious flip sides to China taking any such move. China
cannot afford to tighten its economy enough to start losing jobs. This
would turn disastrous for China because Chinese people aren’t rising
up against a totalitarian communist regime that believes in brute
force and opacity with its own public only because they see a promise
of extraordinary growth and available jobs. China would not like to
take a risk in those quarters. What the changing equations do the
dollar and what dollar does to oil will be an interesting watch from
here on.
Elsewhere the API inventories showed a build of 2.3 million bbls in
oil and a draw of 800 thousand bbls in distillate inventories.
Expectations are for a 1.9 million bbls build in crude.
An interesting piece of observation is the price of Natural gas. Nat-
gas prices are very weak for this time of the year when they
seasonally move up for the winter season. They are expected to go
further weak unless there is news of an extraordinary cold winter.
Reason behind its weakness- Fundamentals-High inventories and
continuing supply.
Sharing very similar fundamentals crude oil is much higher than it
should be. Thanks to the financial side of its being.