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
http://investing.meetup.com/21


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.

Oil Gases Up; Bear Bites Dollar

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.

Week after week after week this spring the media reported a glut in U.S. oil supply. This blog and the New York Investing meetup had to debunk this view of the state of the energy markets more than once. The supply report today once again confirms that the only glut that existed was in the imagination of reporters working for the big media outlets. Storage was way below expectations across the board for oil, gasoline and distillates. This has yet to happen in natural gas, but the market is in super contango just as the oil was in January and early February of this year. Indirectly bullish for oil and natural gas going forward was Russia's announcement today that it is reducing its U.S. Treasury holdings.

Expectations for the EIA's storage report was for a drop of 500,000 barrels of oil and an increase of 750,000 barrels of gasoline and 1.5 million barrels of distillates. Instead, oil in storage fell by 4.4 million barrels, gasoline fell by 1.6 million barrels and distillates fell by 300,000 barrels. This is the third oil report in the last four weeks that indicated a large drop in storage. The oil markets barely moved on this incredibly bullish report, although light sweet crude has been trading today around 71, above the key resistance point of 70.80.

Unlike oil, which has been rallying since mid-February, natural gas has been in the doldrums and is the worst performing commodity this year. This may be changing soon. Natural gas futures are in super contango - the distance future contract are priced well above the near term contract. The July contract is currently priced around $3.80, but the December contract is priced above $6 or more than 60% higher. Oil had the same behavior just before it bottomed and then went up for four straight months. Pay attention to this.

Although it is not getting much play so far, the most important news to come out this morning is that Russia plans to reduce its U.S. Treasury holdings. Along with China, Japan, and the Gulf Oil States, Russia is one the 4 biggest foreign holders of U.S debt. Russia says that it is not selling its U.S. bonds, but will just not replace them when they mature (you should read this as: Russia refuses to buy any more worthless U.S. debt and help us fund our deficit, so we are going to have to print even more money than we were planning). While this may sound like a minor change, it could devastating for the U.S. Dollar. Once one of the major debt holders starts bailing, there could be a stampede for the exits. Did the dollar nosedive on the news? Of course not, it actually went up afterwards. We will have to see just how long central bank intervention can forestall the market's gravitational effects.

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NEXT: Disaster Stalks the Dollar

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

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.

Fed Minutes Take Oil on Roller Coaster Ride

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.

Our Video Related to this Blog:

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
http://investing.meetup.com/21

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.