We have seldom seen a more inconclusive market as crude oil yesterday. Even though a new low for the move down from 104.00 was struck, selling momentum stopped dead at 97.74. The key correlation was the dollar. As the dollar moves lower, oil moves higher. But this will eventually run out of causality as the logic upon which it is based is obviated. Clearly, the Euro is moving higher as bond traders attack the paper of the PIIGS, making yields higher. Sentimentally, as the EU/IMF moves closer to an accommodation with Greece the euro will benefit at the expense of the dollar. But, this does nothing to address the aftermath of austerity programs necessitated by such an agreement which will be negative for energy demand growth. Similarly, the slowing economies in the US, and Chinese attempts to rein in their explosive growth will also negatively affect demand. Ergo, we still think a breach of 96.00 before 101.00 is probable. The negative bias will only be accentuated if OPEC increases production.
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