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Schork Oil Outlook: Japan—First to Take a Second Plunge

Friday, 20 May 2011 | 1:57 PM ET

Thanks in large part to the devastation wrought by the tsunami and earthquake in March, Japan’s economy shrank by 0.9% in the first quarter of this year. The country’s economy has now contracted for two straight quarters, in the fourth quarter 2010 economic activity fell by 0.8%. On an annualized basis, the economy contracted by 3.7%.

As such, Japan is the first G7 country to fall back into recession, but will it be the last?

To this effect, the yen ticked up against the dollar yesterday, so what does that say about the prospects for the U.S.? The ¥/$ cross traded at 81.61, down 0.1% on the day. At the same time the dollar dropped by 0.4% against the euro, and despite a dour outlook from the IEA regarding global crude oil demand, the dollar fell 0.3% against the Canadian dollar.

Yesterday, the IEA released a statement expressing a “…serious concern that there are growing signs that the rise in oil prices since September is affecting the economic recovery". Furthermore, AAA in the U.S. expects the number of drivers to hit the road over the Memorial Day holiday (the start of the holiday season on May 30th) will fall for the first time in three years.

So there you go; Japan, the world’s third-largest economy, has officially entered into a double-dip recession and demand from Canada’s largest buyer of crude oil is waning, yet the U.S. dollar traded lower relative to each respective country’s currency. That’s not a good sign.

Going into today’s expiration of the June Nymex crude oil contract, The Schork Report is advising clients that we are directionally neutral. Volatility is such that we have been making money trading intra-day, but at this time we are unwilling to take significant positions overnight. As far as we can estimate, the front end of the curve for New York crude oil is bound inside a congestive range from around $95 to $106.

Thus, until we see a break above/below this area, we see little incentive to take a directional bet.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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