Oil looks like it hit bottom today

Oil looks like it may have hit bottom today with a convincing test of the 200 day moving average ($70.60). There was even a false breakout down to support at $70.00 to lure in bears before oil rallied back to close on the 200 day. I think today may have marked a near term bottom because there just isn't any catalyst or fundamental reason for oil to break down here.

While the physical market is very weak (as indicated by the nearly $2 1st-2nd month contango), inventories are very high and US demand has been anemic (down 3% yoy) the reality is that overall demand is rising and OPEC has supply firmly under control. Yes output have been growing as the Saudis have ramped up production over the last few months but the Saudis could just as easily cut this production back. Furthermore, excess capacity is declining and overall demand is growing driven by China and the Middle East. Unless the market is acting on significant macro news (Greece about to Default, much more bad news out of Dubai etc.) that is not being reflected in any other market (S&P 500 still at 1100, bond yields rising, Euro holding $1.47) then oil should bottom here and turn higher.

Chinese news can easily provide the "catalyst" for a new bull run back to $75 or $80 over the next few weeks. Chinese auto sales were extremely strong again in November with sales of over 1 M autos and commercial vehicles (up 90% yoy). More importantly, the Chinese government has now committed to supporting very strong auto sales in 2010 as well. This is likely to drive an incremental 1M B/D of Chinese demand next year. That is enough to offset some truly awful numbers here in the US.

Tonight's industial production figures provide another catalyst for this theme with industrial production up 19%. Industrial production doesn't rise 19% yoy without rising oil demand!

I've attached tonight's Bloomberg News Release Below:

China’s Industrial Output Rises 19.2%, More Than Forecast
China’s Industrial Output Rises 19.2%, More Than Forecast Share Business ExchangeTwitterFacebook| Email | Print | A A A
By Bloomberg News

Dec. 11 (Bloomberg) -- China’s industrial production grew 19.2 percent in November from a year earlier, the statistics bureau said in Beijing today.

That compared with a 16.1 percent increase in October and the median 18.2 percent estimate in a Bloomberg News survey of 25 economists. Consumer prices rose 0.6 percent, the first increase in 10 months.

A $586 billion stimulus package, record bank lending and incentives for purchases of cars and home appliances are supporting industrial output, which will get another boost as exports recover. China’s government this week fine-tuned its growth policies by extending subsidies for rural consumers and increasing payments for automobile trade-ins, while scrapping a tax break on property sales.

“Beijing’s fine-tuning of stimulus measures shows that it’s getting more comfortable with the economy’s recovery,” said Lu Ting, an economist at Bank of America-Merrill Lynch in Hong Kong. “The government may start to exit stimulus via curbing investment and loans from April.”

China’s growth accelerated to 8.9 percent in the third quarter, helping Asia to lead the recovery from the global economic slump.

November’s gain in industrial output was boosted by the comparatively low level a year earlier, when exports and growth slumped after the collapse of Lehman Brothers Holdings Inc.

Retail Sales

Retail sales climbed 15.8 percent in November from a year earlier, compared with 16.2 percent in October, according to the statistics bureau. Urban fixed-asset investment rose 32.1 percent in the January-to-November period from a year earlier after climbing 33.1 percent through October, today’s data showed.

Producer prices fell 2.1 percent last month from a year earlier, after dropping 5.8 percent in October.

While President Hu Jintao pledged this week to maintain a “moderately loose” monetary policy and a “proactive” fiscal stance, China’s banking regulator plans to slow new lending in 2010, a person familiar with the matter said this week.

Banks extended 8.9 trillion yuan of new local-currency loans in the 10 months through October. The regulator plans a limit of between 7 trillion yuan and 8 trillion yuan for all of next year, the person said. The credit boom has raised the risk of asset bubbles and bad loans.

Forecasts for China to maintain the fastest growth of any major economy are encouraging companies to boost production and spurring overseas investors to expand.

Expanding Production

China Petroleum & Chemical Corp., the country’s biggest refiner, said this month that it plans to expand the capacity of its second-biggest oil-processing plant by a third. Bayerische Motoren Werke AG, the world’s largest maker of luxury cars, said last month that it will build a new factory worth 5 billion yuan to tap an auto market set to overtake the U.S. as the world’s largest this year.

China’s cabinet and the nation’s top economic planner said this week that they will increase policy flexibility, manage inflation expectations and curb speculative property purchases. Property prices in 70 cities rose at the fastest pace in 16 months in November and the benchmark Shanghai Composite Index has jumped almost 80 percent this year.

Food and energy price increases helped to bring deflation to an end, said Sun Mingchun, chief China economist at Nomura Holdings Inc. in Hong Kong. The government last month approved increases of as much as 8 percent to gasoline, diesel and jet fuel prices and raised retail power charges for the first time in 16 months.

--Li Yanping, Kevin Hamlin. Editors: Paul Panckhurst, Stephanie Phang.

To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg