In recent months, an unusually strong relationship between oil prices and equities has developed. With concerns over Europe steering global equity markets, stock market rallies have been accompanied by a weaker dollar, which in turn has boosted oil prices. Moreover, worries over raw material demand have intensified with equity market plunges, and vice versa. Thanks to bullish reports out of Alcoa and CSX on Monday, as well as a robust report from Intel on Tuesday (the company posted its biggest quarterly profit in a decade), oil is up more than 5% over the past week, and is now close to breaking through the $80/bbl. level. From there, oil will be just $11 short of its 52 week high, a level which would have been unthinkable just a few months ago. “The surge in oil futures is financially related as equities are moving higher. At the same time, we’re seeing a weakening of the dollar against the euro as also supportive for crude,” said Joe Posillico, broker at MF Global in New York [also see Finding The Right Oil ETF For A Crude Rally].
Oil’s mirroring of equities may subside in the short term, as the U.S. Department of Energy’s weekly inventory data is released at 10:30 a.m. EDT today. This important release will show the draw-down or build up of oil and gas over the past week, and is considered a good short term indicator of oil demand. When oil is taken out of stockpiles, it is generally interpreted as a bullish indicator; more businesses and consumers are using the commodity. On the other hand, an addition to oil supplies would suggest that we have not yet reached an point of a quality economic recovery.
A Reuters poll ahead of the inventory report forecasts a 1.4 million barrel decline in crude stockpiles. Oil prices were already buoyed by a report from the International Energy Agency on Tuesday that increased the estimate for worldwide oil demand growth in 2010 by 80,000 barrels per day, but said this growth would slow in 2011. If another bullish report comes out Wednesday, oil could maintain its momentum [also read USO vs. OIL: A Better Crude Oil ETF?].
Look for the United States Oil Fund (USO) to be in focus on Wednesday. USO offers exposure to light, sweet crude oil by investing in near month futures contract traded on the New York Mercantile Exchange. The fund, which has been heavily impacted by the positive equity market over the past week, looks to follow the Energy Department’s report for direction tomorrow after posting a 2.8% gain in yesterday’s trading. Investors will be hoping for an impressive report to boost USO’s sagging share price; the funds is down more than 10% so far in 2010 [see Five Reasons USO Could Be Ready To Soar].
Disclosure: No positions at time of writing