Oil Market breakdown. Hey, like wow! It appears supply and demand still matters. Some people watching the energy markets the last few weeks (even many I have spoken to) are shocked that oil prices can go down. Who can blame them? Many of them have only seen them go one way - and that was up, up, and away. For the majority of this year, oil has had a sense of bullish inevitability. Yet, oil has gone down… and not only gone down, but plunge from an all time high of $14,727 on July 11th to a low of $12,352 yesterday. This got people to realize what can go up can indeed come down. It can come down as fast as, or faster, than it went up. What is the reason? Very simply put; the laws of supply and demand are beginning to take hold.
Yesterday we did bounce - and we bounced for a couple of reasons. As the stock market got obliterated on bad housing news, traders came back to oil as a safe haven. On top of that, a refinery fire gave a boost to heating oil. Reuter’s news reported that a fire blazed at the Curacao based Isla (a 320,000 barrel-per-day) refinery in a distillates unit that produces lubricants. That helps lube a comeback in distillate. Yet, really we bounced because, let’s face it, we fell too hard.
But there are more signs of rising supply. Saudi output is rising. Petrologistics reported that OPEC oil production is expected to rise by 200,000 barrels a day, to a whopping 32.9 million barrels of oil a day. Saudi production will rise to 13 million barrel of oil a day. The amazing thing is that they are already having a hard time selling what they have.
Grey clouds are going to clear up as oil bears put on a happy face. Are oil traders finally getting ready to take off that gloomy mask of tragedy and put on a happy face now that Dolly looks like it is going to be a big drip? The skies are clearing in the oil market and I am not just talking about Dolly, but the outlook on the larger macroeconomic picture that has clouded everyone’s view of supply versus demand. The August crude expiration ended on a down note partly because of the storm concerns easing. But it was mainly because of comments by treasury secretary Hank Paulson and Philly Fed President Charles Plosser.
What did Hank Paulson say that might cause oil traders to sell? Mr. Paulson said very simply that the United States is on the right path to resolving our financial and housing market turmoil. They may not sound like much but traders looking to confirm that the lifting of their long oil short financial play was the right idea this was music to their ears. Mr. Paulson said at times the road ahead may be bumpy - but that might not matter as much with gas prices being so high. Like you can afford to drive anyway…
If those comments were not enough to get you in a ‘sell oil’ mood, what about the comments by Philly Fed President Charles Plosser? He said that US monetary policy is between a rock and a hard place and that an interest rate increase could come faster than expected. Those comments hit the dollar and helped drive commodities lower. Now keep in mind that Mr. Plosser, hawkish on inflation, voted to with Bernanke. His comments are none the less interesting. Mr. Plosser said, “In sum, this year and next will be quite challenging. The economy will grow this year but at a slow pace, and the unemployment rate is likely to get worse before it gets better. At the same time, inflation will be uncomfortably high for a while. In recent months I have heard some analysts suggest that the current economic situation is not like the 1970s because unions are less prevalent and there is no evidence as yet of a wage-price spiral. Thus, a weak economy, with rising unemployment and declining payroll employment, will presumably prevent workers from demanding higher wages. But, again, that story has things backwards. It is not demands for higher wages that kick off the spiral, but the loss of confidence that the central bank will keep inflation controlled, which, in turn, leads to a rise in inflation expectations. The wage-price spiral is not the cause of the inflation, but the result.
This means that if monetary policymakers wait until they see the evidence of a wage-price spiral, they will be too late — the public will have lost confidence in the Fed’s ability to keep inflation under control, and this will make the job of bringing inflation down much more costly and difficult. Moreover, we could end up with a period of both low economic growth and high inflation.”
Mr. Plosser is saying that the Fed, despite the monetary problems, will raise rates and that in turn will support the dollar. It also means that the Fed Is coming back to their inflation fighting senses and with the bank woos mostly out in the open, oil traders are realizing that the financial oil hedge is over for the time being. I have said it before and I will say it again; the main reason oil has gotten as high as it has is because of the ongoing financial crisis. Oil has been used as a hedge against major financial risk; whether we are talking the dollar, bank failures, Fannie and Freddie, poor government regulation, you name it. Call it a bubble if you want but don’t call it speculation; because mere speculation, as a description, does a great injustice to how the markets function and serves the greater economic good.
Of course, many in Washington still do not get it. The senate has opened the floor to debate on trying to reign in the very thing that may have saved this economy from a total economic collapse; and that is speculation! This time the oil market, next time the stock market, and eventually the entire US capitalistic system. Sen. Byron Dorgan is particularly clueless when he says, “Nothing that has happened in supply and demand remotely justifies the doubling of the price of oil in the year.” Oh, yeah? Says who? Why is Sen. Dorgan all of a sudden smarter than the markets? Is he a trader, an analyst, or an oil man? Has he looked at worldwide inventories? Has he looked at the dollar! Does he realize that the confidence in the US economy and its housing market is in bad shape? If he is aware of all that, maybe the distinguished senator would like to tell us what a fair price for oil might be. Is it $50 a barrel? Is it $70? Well, he better be right because if he sets the price too low the US will use more oil and eventually will run out. If he sets the price too high he will slow economic growth to a standstill and put thousands of people out of work. Sen. Dorgan, this false belief that if we rein in speculators from the market that oil prices would somehow be magically lower is not only false, but a danger to the economy. Sen. Dorgan, for every buyer there is a seller, and the more liquidity the better chance that we will all get a fair price for oil. Bad regulation (your part in a tight global market) may lead to less market transparency and potential shortages of supply. Arbitrary position limits in a market whose demand is at, or near, its all time high demand levels is counterproductive. The increase in so called speculation is simply a reflection of what is happening with oil on a global scale. Take Sen. Harry Reid, who claims experts say that speculation accounts for 20%, 30%, and even 50% of the cost of a gallon of gasoline. Of course Sen. Reid; these experts who say this have no facts to speak of on this so it’s only speculation. They have a right to speculate of course unless you clamp down on that as well.
Stay with Fox Business News to get the latest developments and to see me! Also, to open your account, and to get on the Phil Flynn Energy Blast, just call me at 800-935-6487 or email me at pflynn@alaron.com to open your account! Market conditions are moving fast so call for trade updates!
