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Schork Oil Outlook: The 'Second Derivative' Nonsense

What ever happened to that second derivative?

Disappointing economic headlines in the U.S. are popping up with greater frequency. Over the last two weeks the following reports all came in below market expectations:

Empire Manufacturing, Housing Starts, Industrial Production and Capacity Utilization, MBA Mortgage Foreclosures, Existing Home Sales, Leading Indicators, Philadelphia Fed, Chicago Fed, Durable Goods, GDP and Consumer Spending.

As such, the strength and sustainability of the U.S. recovery is in question. This brings to mind all of that… second derivative gibberish that was de rigueur two years ago. Maybe, less bad, was really bad after all? But here is the Catch-22; poor economic headlines are actually supporting higher oil prices vis-à-vis the U.S. dollar.

We do not think it unreasonable to assume that a questionable outlook for the economy is bearish for oil. However, a questionable outlook for the economy is also bearish for the currency. Thus, while over the last two weeks we have digested a rash of poor economic news, spot Nymex crude oil for July delivery rallied 2.8%, while the dollar fell 1.1% against the euro currency .

Bottom line, as goes the dollar, so goes oil, in the opposite direction. In today’s issue of The Schork Report , analysts draw attention to the fact that per Friday’s update from the CFTC, speculators were holding their first, net long position in the ICE U.S. Dollar Index, since January.

With QE2 winding down, it might appear that speculators are itching to get bullish the dollar. If that is indeed the case, then they might also be ready to dump oil.

While we have to be on guard for another run towards the highs we saw in April (?$115 Nymex and ?$127 ICE), Wall Street bulls have to be wary of The Gap… which was created by February 18ths 87.88 high print and the following session’s (February 22nd) 89.77 low print in WTI.

This gap will eventually get closed. With Wall Street so bulled up on oil, and a precarious outlook for the economy, would this not be an ideal time for a flush?

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