Thursday, July 30, 2009

Oil Update - EIA, CFTC, and USD

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Light sweet crude fell 5.8% yesterday, a crash level one day drop. The EIA weekly storage report set off the selling. Crude closed at $63.35. It was $3.60 below Brent, a lower quality oil. The CFTC has started hearings this week and traders are claiming that they are completely politically motivated. Their evidence? - the CFTC's own reports. Oil was also damaged by a rising dollar. The dollar was rallying on the 'good news' that the U.S. was printing money to buy its own bonds (no that doesn't make any sense). As has been the case since the beginning of June, when the dollar goes up, everything else went down.

The EIA reported that oil storage was up 5.1 million barrels. Distillates were up 2.1 million barrels, but gasoline stocks fell 2.3 million. The mainstream media reported that distillate stocks were at their highest level in 25 years (take that with a grain of salt). Year over year distillate demand is down 10.7% and jet fuel demand dropped 13.3%. Gasoline demand is up by 0.8% however. At his time of year gasoline is the key demand driver for the oil market.

The CFTC has started its hearings this week trying to track down the evil speculators that have been manipulating the oil market. Interestingly, on Monday the Wall Street Journal reported the CFTC "plans to issue a report next month suggesting speculators played a significant role in driving wild swings in oil prices - a reversal of an earlier CFTC position." On Tuesday, the Journal reported that the CFTC is "updating- but not necessarily reversing - a 2008 report that blamed supply and demand, rather than speculators" for last year's spike in oil prices. So let me summarize this news for you. The CFTC already investigated this subject last year and found that the oil market like every other market operates on supply and demand. Not trusting its own work and the basic laws of economics, it has decided to investigate again. To get to the truth, it is holding hearings. However, before the hearings have even begun and data gathered, a decision was already made to blame speculators in the report that will be issued. At this point, you should be smelling a giant rat the size of Washington, D.C.

I actually don't doubt for a moment that there is speculation driving the price of oil to non-market prices. It's not taking place on the trading floors in New York, London or Singapore however, but from government offices on the Potomoc and Thames. To help clarify this picture, it might be a good idea to change Ben Bernanke's title from Fed Chair to Speculator-in-Chief. At least then, the public would know what he is really up to.

NEXT: Economy is Bad, but GDP Report is OK

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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