Thursday, April 9, 2009

Fed Minutes Take Oil on Roller Coaster Ride

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It would be easy to get whiplash watching the oil market these days. The news was grim early in the morning yesterday with blaring headlines of oil falling below $48 a barrel in anticipation of a bad news oil storage report at 10:30AM. Storage however turned out to be below expectations and oil started rallying immediately. NYMEX oil got to over $51 a barrel mid-day, rising above the key breakout point around $50.50. Then late in the afternoon the minutes from the last Fed meeting were released and even though they should be taken about as seriously as a Mel Brooks movie, oil nosedived on the Fed's gloomy outlook for the economy. In the end oil was up 23 cents, closing at 49.38, though today in mid-session European trading it's above $51 again.

The price of oil was weak early Wednesday because of a report Tuesday evening from industry group, the American Petroleum Institute, that indicated there was 6.9-million-barrel build in storage.This report is not terribly reliable because it is not comprehensive and submitting data is voluntary. The government's EIA report that came out the next morning, painted a very different picture of the oil market. Oil in storage rose 1.7 million barrels, much less than the 2.3 million barrels that analysts had predicted. Distillates, which include heating oil and diesel, fell by 3.4 million barrels versus expectations of a drop of only 600,000. Gasoline demand was reported as being 0.2% below a year ago (if demand was 100 a year ago, it is now 99.8). While the drop in U.S. gasoline demand is something you would need a magnifying glass to see, the mainstream media has continually reported it as collapsing and falling off a cliff or words to that effect.

Despite the bullish tone of the storage report, oil (and most of the rest of market) sold off big time when the meetings from the Fed's March meeting were released in the late afternoon. The Fed, which didn't see the Credit Crisis coming, miscalculated it at every twist and turn, and didn't foresee the recession, is now gloomy for the next two years going forward. Sure they were wrong over and over and over again, but now they know what's going on. The minutes also indicate the Fed is worried about deflation even though it is stated in the same minutes that they are printing new money like no tomorrow. Worrying about deflation under such circumstances is like worrying about being attacked by Big Foot while walking through Central Park. The probability is somewhat less than zero.

While gasoline demand in the U.S. is flat, it should be rising in China. For the last three months cars sales in China have exceeded car sales in the U.S. Year over year, car sales are down 37% in the U.S., but up 5% in China. China is on its way to becoming the number one auto market and the number one energy user. Oil demand is shifting from North America to East Asia while the ability to produce oil is declining 6% a year by some estimates. There are even predictions out there of an oil price spike as early as later this year. While I don't necessary believe it will happen that soon, it will indeed happen as some point.

NEXT: It's Not the News, It's How the Market Reacts to the News

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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