Crude

Courtesy of the IEA which earlier loudly announced 'No More SPR Releases' (although like the ECB earlier announced it would not accept defaulted Greek debt as collateral only to reneg, this is total bullshit), and another massive taxpayer funded iteration of EFSF monetization-infused moral hazard, crude is back to $100. Since the EFSF will very soon be expanded to over $1 trillion and since this is nothing less than Europe's version of QE, and paradrops money that just like the Fed's own daily POMOs will ultimately find its way into the market, as holders of toxic Greek debt shift their assets into risk holdings, we expect crude to surge to $110, then $120, then $130 and so forth until another global depression has to be called in. And, naturally, the same with every other hard asset that can not be diluted.

After we reported about the aberrant Crude Oil Futures algo earlier, we asked out friends at Nanex to take a closer look. What they discovered is something far more disturbing than merely another iteration of the confused "fractal" algo seen previously trading Natural Gas.

A month ago we presented the strange case of the fractal algo gone amok while trading natural gas in a low volume after hours session. We expected that we would see this surreal trading pattern in other commodities shortly, although little did we know that it would impact the most important of them all, as soon as month later, and during peak trading hours. As the chart of CL EQ1 below shows, not even crude is safe any more from this aberrant trading algorithm which has now infected, it is safe to say, virtually every product. If NYSE Boerse's Duncan Niederauer is really confused about what is causing retail investors to depart in droves out of pure disgust with what are terminally manipulated markets (and not just stocks), we hope this chart provide at least a few clues.

At this point we refuse to even recall whether Goldman is long or short oil. Probably so does Goldman, whose Brent recos have become the same laughing stock as Tom Stolper's EURUSD "strategic" price targets in 2010. Yet Jeffrey Currie has found a new way of dealing with appearing idiosyncratically idiotic. Instead of focusing on any one product, the firm has just upgraded (or rather, maintained its buy) the entire commodity space wholesale: "Progress in dealing with the Greek budget crisis and better economic data have improved sentiment around cyclical assets in recent days. We continue to expect further increases in commodity returns later this year and into 2012. We maintain our overweight recommendation for commodities on a 3-, 6- and 12-month horizon and our 20% 12-month commodity returns forecast." Um, yeah, this comes less than two weeks since the last flip flopping on the matter: "The International Energy Agency announced today that its member countries have agreed to release 60 million barrels of oil from their emergency stocks over a period of 30 days. The IEA has coordinated this release, only the third in its history, in response to the ongoing loss of Libyan light sweet crude oil production and the impact that the resulting higher crude oil prices are having on the world economy. We estimate that a 60 million barrel release by the end of July has the potential to reduce our 3-month Brent crude oil price target by $10-12/bbl, to $105-107/bbl. 125/bbl." Way to preserve street cred there Jeffrey. Of course, the aforementioned flipflopping does not prevent Goldman from mocking the IEA's ridiculous SPR release decision, as well as reiterating its upside expectation in the metals space, with an emphasis on gold, copper and zinc. As a reminder, if Jeffrey says "buy", run, Forest, run.

As was previously disclosed, as part of the SPR's auctioning off of 30 million barrels of light sweet crude, bids for a total of 30.64 million barrels of oil at an average bid of $107.20/barrell were submitted by various parties. The only thing unknown was the identity of the parties, which however has now been all cleared up following the release of the complete bid list from the DOE. Probably the most notable (if not completely expected) discovery is that JPM, that FDIC-insured depositor bank, has requested 1.5 million barrels at a price of $105.33 for a total of $158 million. We wonder just what JPM plans on doing with this crude, which as predicted, will be transported by vessel, and offloaded at such time as JPM sees fit, probably well after the product is trading at a substantial premium to the purchase price. Other potential buyers include Valero, Vitol, Shell, Conoco, Plains and various other E&P companies. Ironically, JPM wants more crude than Sunoco and Tesoro: so next time one tries to gas up their car, we suggest looking for the JP Morgan gas station. But by far the most important news is that 80% of the bid are based on a vessel-based distribution, meaning it will be weeks if not months before the SPR disposed crude finally makes it into circulation, if at all, and has an actual supply-side benefit. Complete bid list is attached.

By now we have heard every worthless Wall Street economist expound on the bull case for the economy courtesy of a ultrashort-term dip in oil and gas as a result of the moronic IEA decision to tap strategic reserves. And while short-term gyrations are largely irrelevant when as we presented yesterday, and as the FT confirmed, the bulk of volume and price formation comes from speculative daytraders, the longer-term dynamics for crude point in only one direction. Up. Here is UBS Andy Lees to explain why despite the brief jump in crude (which will likely never make it into the system courtesy of banks taking the purchased light sweet crude and storing it in tankers) supplies, we are facing a substantial supply-side crunch as soon as a few months from now.

The CFTC has just released two new reports looking at volume in various commodity futures and confirming what most have already known, namely that under 10% of daily futures volume in the most popular products comes from Large Trader position changes. The balance or well over 90% in most cases, originates from "daytrading" accounts, or said simply, speculators dominate price formation on the margin for the bulk of products, which also means that longer-term equilibrium levels, those determined by supply and demand, are largely washed out when all the daytrading, and thus short-term pricing, mania is factored in. This also explains why moves such as the recent desperate SPR release by the IEA are generally doomed to failure. The CFTC's Gary Gensler said that "The data shows that, in many cases, less than 20 percent of average daily trading volume results in traders changing their net long or net short all-futures- combined positions. The balance of trading is due to day trading or trading in calendar spreads." This is bad news for the hedging departments of commodity firms which deal with actual physical, and thus try to hedge price swings, as long-term price expectations are largely moot when attempting to predict short and medium-term price fluctuations. In fact, bets, even correct ones, may ultimately add to price volatility if caught in a wrong-way position that faces collateral requirements. As to whether this new data will change the administration's approach to artificially setting prices on key political commodities such as oil and precious metal, all signs point to no. This also means that churning HFT parasites, which are part of the non-Large trader universe are likely the most determining marginal price determinants for the bulk of commodities,and yes, that includes ES and interest rate products as well.

According to Bloomberg, instead of the crude released by the Strategic Petroleum Reserve going into circulation, "Some of the oil being released from the U.S. Strategic Petroleum Reserve to bring down prices may be held by traders for later sale rather than sent directly to refiners for processing into gasoline or other fuels." In other words, instead of being held in storage by the US government, the oil which is supposed to be used immediately to alleviate supply pressure, will be held in storage by the Too Big To Fails, most likely in storage tankers floating offshore, just like back in late 2008, early 2009, to be released only when the prevailing price is sufficiently higher (not to mention courtesy of added demand from the SPR as it seeks to refill it 5% depleted inventory). But wait, wasn't the release predicated upon it being a supply emergency with a need for immediate release? Ironically it is JPM's own Lawrence Eagles, head of oil research, who said that "every additional barrel of oil stored in the U.S. is a barrel that does not need to be imported, ultimately freeing up barrels to move to Europe. It worked very effectively after Hurricane Katrina in 2005 and should do so this time around." What he did not specify is held by whom. And here is the kicker: "The DOE has no preference for bids from refiners versus traders and both have participated significantly in past sales,” an official from the Energy Department wrote in an e- mail. “There is nothing to stop buyers from putting the oil they have purchased into their own storage." Well in that case the DOE would be advised to know that JPM, which is expected to bid and purchase a substantial portion of the crude to be released, together with Goldman Sachs, have already been alleged to be a supply-limiting cartel when it comes to LME commodities. In its infinite stupidity, the administration and the IEA have merely moved supply constraints from one oil cartel, OPEC, to another: one led by the Too Big To Fail banks.

Following the abysmal decision by the Obama administration, presented in IEA letterhead, to release crude stockpiles, the resulting lower prices lasted less than one week, and in the case of gasoline, the price has actually surged way above the decision day fixing. So what is an administration with no credibility to do? Why double down of course, and sell even more crude at firesale prices to the Chinese. Per Reuters: "The International Energy Agency could decide by mid-July whether the release of strategic oil reserves needs to be extended for a month or two, an official said." And there is that transitory word again: "Richard Jones, deputy executive director of the
IEA, said he believed the release would be temporary since demand would
likely drop in the fourth quarter." Well demand may drop, but the last time demand was actually relevant in price discovery was sometime in the 20th century. Welcome to the era of oil prices defined by monetary policy.

Now that the impact of the first (of many) SPR release moves courtesy of an Obama administration desperately in need of political brownie points has been beyond wiped out, it is time for the IEA to leak rumors of another emergency meeting, and for our brilliant and fearless leaders to announce they are about to sell another 30 million barrels. After all there is just under 700 million barrels in the SPR now (pro forma for the first release).

Remember how 4 very long days ago, the 60 million barrel SPR release was vaunted as being the reason for the second consumer renaissance after it was largely expected it would lead to sub $90 crude, and low $3/gallon gas, and result in every Joe Sixpack going out and buying 3 houses at least? Well, so much for that: the IEA's action has now been fully priced in and WTI is back to precisely where it was before the IEA announcement on Thursday. Which means that what some said was a shadow QE (and don't get us started on all the mainstream media "journalists", among which Bloomberg and CNN, who continue to confuse QE Lite with something they call QE 2.5) had a half life of just over 3 days. Expect future intervention half lives to continue declining, as the criminal banking cartel's ammunition is now down to just one thing, the only thing, printing.

Good afternoon. Quick synopsis of macro-thoughts. I’m not used to writing market comments or market updates anymore given the all things government and policy impacts on markets. It seems too often that it was as simple as the Treasury is selling the Fed is buying. And that was it. Simple. Whatever the reasons, there are implications of today’s bizarre events. There are lots of views which can be observed by schizophrenic price action in markets today. Let me share mine.

While the market appears to be happy with promises for incremental crude output by Saudi Arabia which has now broken off from the broader OPEC cartel and is doing its own pro-US thing, JPMorgan, which at last check still had a Brent target of $130/bbl, once again introduces an unpleasant dose of reality in the crude story by noting that any increase in crude output by the rogue OPEC state may be offset by production drops in Iraq and Iran. Will Saudi now promise to offset even that drop and hike output to 11 mbd or some other more unbelievable number? Stay tuned for more lies from the "peak oiled" kingdom.

In its just released must read Statistical Review of World Energy, BP has many critical observations, the key of which, while not a surprise to most, is that as of 2010, the US is no longer the world's biggest consumer of energy. The new leader, with a 20.3% share of global energy consumption: China. Keep in mind that the Chinese economy is still (in whatever centrally planned terms it discloses) not even half the size of the US, thus one can only imagine how far this number will rise should China ultimately succeed in its goal of converting from an export-led to a consumer-led society. And here we have a market worried about a few million bpd in quota courtesy of the now defunct OPEC. From the report: "World primary energy consumption – which this year includes for the first time a time series for commercial renewable energy – grew by 5.6% in 2010, the largest increase (in percentage terms) since 1973. Consumption in OECD countries grew by 3.5%, the strongest growth rate since 1984, although the level of OECD consumption remains roughly in line with that seen 10 years ago. Non-OECD consumption grew by 7.5% and was 63% above the 2000 level. Consumption growth accelerated in 2010 for all regions, and growth was above average in all regions. Chinese energy consumption grew by 11.2%, and China surpassed the US as the world’s largest energy consumer. Oil remains the world’s leading fuel, at 33.6% of  global energy consumption, but oil continued to lose market share for the 11th consecutive year." And in terms of production reserves: "World proved oil reserves in 2010 were sufficient to meet 46.2 years of global production, down slightly from the 2009 R/P ratio because of a large increase in world production; global proved reserves rose slightly last year. An increase in Venezuelan official reserve estimates drove Latin America’s R/P ratio to 93.9 years – the world’s largest, surpassing the Middle East."

Contrary to ongoing wideranging skepticism, Saudi Arabia continues to posture that not only does it have substantial excess capacity, but that it will bring it online any... minute...now. After all, Saudi owes the US a big favor (i.e., lower gas prices) in exchange for America's (or rather its Fifth Fleet) continued presence in Bahrain, which even those living in a cave know has been under a full media blackout to keep the ongoing religious tensions under wraps and keep the Saudi-Bahrain border safe (not to mention the Ghawar oil field). So even as Saudi had promised to hike its output as Libyian production went offline only for it to be discovered that the country had in fact lowered production, so now too the song and dance has hit fever pitch. Reuters reports that "Saudi Arabia is planning to lift oil output sharply in June, whatever policy OPEC adopts this week, in an effort to rein in high fuel prices. Riyadh expects to lift production by more than 500,000 barrels a day in June to its highest for three years, a senior Gulf industry official familiar with Saudi oil policy told Reuters." We can't wait to hear how Saudi's unilateral plan to boost Obama's reelection chances is met by other OPEC members such as Iran, Venezuela, Iraq and Libya. "Worried about the impact on economic growth of
inflated energy costs, Saudi will act alone if necessary to keep a lid
on prices now at $114 a barrel for benchmark Brent crude." Wait, isn't OPEC a "cartel", or a place where unilateral decisions are not allowed, for precisely this reason? Of course, at the end of the day, with recent Wikileaks disclosure that Saudi Arabia admitted it has overstated its reserves by some 300 billion barrels, or 40% of total, this latest ploy to push gasoline prices lower into the summer season will have a half life that is shorter than the SNB's FX intervention attempts.