Not buying what the Fed is selling? Commodities soar the day after the Fed fails to convince traders they have the power to raise interest rates after all. Well, maybe power is not the right word; "ability" may be better.
Soft economic data warnings about autos and banking made it clear to the market that the Fed is between the proverbial rock and a hard place. And, if the Fed cannot raise rates as our buddy Jean Claude Trichet signals that Europe will, the only place to go is back to the hard commodities markets. Oh sure, there were those threats from Libya to cut production, and those bold predictions of $150 to $170 a barrel oil from the OPEC President for this summer. But, it was obvious from the rest of the commodity world around us that this rally was about much more than anything OPEC had to say.
I had hoped that oil might break down because of slowing demand, but it’s obvious that the problems in the economy are deeper, and more dangerous that I had thought. The only thing that has the power to slow this rally might be some good economic news or a change of heart from the European central Bank; and it appears that in the near term that is unlikely.
That then moves us to our next clear and present danger, which is the assault on oil market speculators. Reuters News reported that the US House of Representatives was scheduled to vote Thursday on legislation that directs the Commodity Futures Trading Commission to use all of its authority. This includes the agency’s emergency powers; to “curb immediately” the role of excessive speculation in the energy futures market. Now what is excessive speculation in the futures market? Well, at the end of the day, it is what any politician says it is. For example, the article quotes House Speaker Nancy Pelosi as saying that, “The American people should not be punished at the pump for the actions of oil speculators.” Yet I assume, Speaker Pelosi, it is ok that the American people get punished at the pump because of your anti-energy policies that have highlighted your career. Ms. Pelosi's record on energy is abysmal, and she, more than any energy speculator, has had a hand in raising gasoline prices. Ms. Pelosi and her party used to go after the oil companies for making record profits and have worked harder than almost any politician in Washington to block US oil production and the expansion of building new refineries, etc. Yet with recent polls finding that most Americans are fed up with the fact that this country and our US oil companies are not drilling more, she and the members of her party have to find a new scapegoat. That scapegoat is the oil market speculator. If Congress follows through on these boneheaded measures to go after oil market speculators, they will do further damage to an already badly damaged economy. The truth is that this assault on the free markets may cause an oil shock that will lead to shortages and drive this economy into a deep and painful recession.
What the House has to learn is that you may be able to take the speculator out of the market, but you will never remove speculation from the marketplace. If you force pension funds and ETF’s out of the oil market do you really think that is going to change the fundamentals? No. Oh sure, oil may break. But the funds that were in oil may go in and short the dollar, or short the stock market. The stock market could crash because of the US Congress and their ignorance when it comes to understanding free markets and the role of speculators in our markets.
In a world without oil speculators the dollar may become even more worthless. Sovereign wealth funds that had used the futures to hedge the risk of the falling dollar could end up buying the actual commodity and hoard the product. They could buy tankers to store oil and the supply taken off the market would cause oil to surge even higher. Oil producers may not sell oil to the US because of fear that its currency may become worthless. The lack of supply may put us into a deep depression.
You think this is far fetched? Well, it is more realistic than the comments made by Congressman Bart Stupak (a Democrat from Michigan, and Chairman at the hearing of the House Energy and Commerce subcommittee in Washington) who said, “Make no mistake about it, the excessive speculation in commodity markets are having a devastating effect at the gas pump that is rippling through our entire economy.” No Congressman Stupak. It's Congress that is having a devastating effect at the gas pump that is rippling the entire economy.
Now, no one ever said he is biased, did we? Did he ever hear of innocent until proven guilty? These kinds of false, unsubstantiated charges are political theater at its worst; designed to mislead and misinform a confused public.
As I said before, the Democrats thinking is not only a danger to the free markets. It is ultimately a danger to the economy and to every American. Congress is living in a fantasyland in Washington DC with their fantasy energy policies that have done nothing to increase supply. Yet, they turn blame on the speculators that have, for years, been saying that oil demand is on the rise and supplies are not keeping pace. Now that it's being proven true, Congress, instead of heeding the warnings of the speculator, now chooses to kill the messenger.
Even some analysts who ought to know better have tried blaming the speculator for the rise in price. Some who blame oil speculators have a political agenda. Others use it as a convenient excuse for the market fundamentals being wrong. Yet, the vast majority of people who blame the speculators still don’t get how the markets work, and fail to grasp why speculators might be attracted to the oil market in the first place.
Take for example Michael Masters, of Masters Capital Management, who said that oil prices could drop to $65 or $75 a barrel within 30 days with more regulation. He claims that if the US puts more regulation on a global market, that it will somehow have oil prices more closely reflecting the marginal cost of producing oil. So, I guess you can regulate geo-political risk and get the rest of the world to sell oil because the US is regulating more. This is absolutely a preposterous statement with no basis in fact or reality. Others want to blame oil funds and point to the fact that speculators have increased their share of oil futures contracts on the NYMEX to 71% this year from 37% in the year 2000. Has anyone seen what has happened to the price of oil since 2000? Has anyone paid attention to the amount of increased demand since 2000? Don’t they realize that any market that has been in a seven year bull market might attract some speculators? And besides, some of those that get thrown into the speculative pool may have legitimate reason to use oil as a hedge against a stock portfolio.
Congressman Dingell says that Congress should explore a full range of options to limit speculation; including raising margin requirements for financial speculators to 50%, prevent pension funds from investing in commodities, and prohibit investment banks from owning energy assets. Well Congressman Dingell, if you ban US investment banks from owning energy assets, what is to stop foreign banks and sovereign wealth funds from buying energy assets?
This leads me to my next point about the myth of ETF’s, and buy-only funds that never, ever want to take a delivery of the actual product. Write this down: for every buyer there is a seller! Period! End of story! Got it? And perhaps we should be glad that these funds don’t take delivery of the product and use the futures market to hedge. Would you prefer that they have to hedge using the real product? And what about sovereign wealth funds that get paid in dollars? Would you want them to buy oil instead of futures contracts?
If I have said it once, I have said it a thousand times. In a liquid market, speculators don’t drive the market, but are driven to the market because of strong fundamentals. Speculators cannot forever hold a price level unless there is some fundamental reason backing them up. I have said this since oil surged to the high price of $125 a barrel and will continue to say it as it approaches $150. If you want to get speculators out of the market, don’t regulate it. Fix the fundamentals - just those little fundamentals; like constant Nigerian conflict, or the US dollar, or the ever present potential for trouble in the Middle East.
See me today on the Fox Business Network! If you do not get it what are you waiting for - $65.00 oil?! Call your cable operator today! Call me at 800-935-6487 or email me at pflynn@alaron.com to open your account!
We're short August crude from approx. 14,000 - stop 14,370.
We're short August RBOB from approx. 35,700 - stop 35,900.
Buy August heating oil at 37,600 - stop 37,400.
Buy August natural gas at 1,220 - stop 1,200.
Have a GREAT day!
