London, 9 October 2010

Although there were ups and downs during the week, front-month prices for NYMEX WTI and ICE Brent crude oil ended up at $82.65 and $84, only $1 and $0.20 higher than a week ago. Long-dated crude prices (Dec. 2015 WTI) were also relatively stable, edging up by a slight $0.35 to $91.90. Despite the small weekly gains, the pattern of price action gave the oil markets a more subdued feel, because prices peaked on Wednesday, fell on Thursday, and only clawed back a little bit of lost ground on Friday.

Technicals are now neutral, rather than bullish, and reports indicate some producer hedging (selling forward). There has also been some profit-taking, and top-of-the-range non-commercial net length on the NYMEX, after big gains, means that more profit taking can be expected. Last but not least, QE2 – which is bearish for the US dollar, bullish for inflation expectations, and bullish for oil – looks like it may be just about priced in, though this is a big wildcard.

In last week's Oil Drivers, we said that the markets would look closely at today's US jobs report, and that the reaction would be illustrative. On balance, the US employment report was weaker than market expectations, and crude prices rebounded, more than making up for losses earlier in the day. Although it may have been the case even before the labor market figures, the report seems to seal the deal for QE2 measures, which we expect to be announced on 3 November.

For the time being, this is a topsy-turvy market: bad economic news is bullish for oil, because it reinforces the case for QE2; conversely, good economic news is bearish, because it raises doubts about the timing and size of QE2. That said, the fact that this key report did not cause prices to regain their mid-week highs tells us that QE2 appears to be mainly priced in already.

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