Crude

While Americans were purchasing stuff they don't need with money they don't have to impress people they don't like in the holiday week (but making sure to keep those tags off - you don't get record gift returns if you damage the product or rip the tags off), it appears they did so by walking everywhere. Either that or when it comes to determining real consumer purchasing power, the real answer lies at the pump. According to MasterCard, U.S. gasoline demand sank 14 percent from the prior week to the lowest level in more than seven years of records, as reported by Bloomberg. "Drivers bought 8.16 million barrels a day of gasoline in the week ended Dec. 30, down from 9.46 million the week before, according to MasterCard’s SpendingPulse report. MasterCard’s data goes back to July 2004." So we have just had the lowest gas demand week on record, and that's with gas still at relatively low prices considering what has happened with WTI. One wonders what will happen to end demand when prices finally trickle through. Or perhaps this is all just the central planners' insidious plan to get everyone in America to buy Government Motors magically exploding electrical fire hazard bumper cars? The people demand to know.

As if the situation in the Gulf was not enough on edge, here comes Europe with news, via Reuters, that EU governments have reached a deal to ban Iranian oil imports. The only thing pending is the determination of the starting date and other details. The result, as expected, is another leg up in crude. Sooner or later, this relentless rise higher will spill through to the pump, which according to the Michigan Bizarro confidence indicator will sent consumer optimism to historic levels. And now, the escalation hot grenade is back in Iran's court. Expect more missiles to be fired into the water and more rhetoric about Straits of Hormuz closure in 5...4...3...

Is idiosyncracy the substitute for a fledgling Sovereign Bond Market?  Including our recommendations for 2012

There are dim lights at the end of the seemingly darker and darker tunnel. The proposed sanctions legislation allows Obama to waive sanctions if they cause the price of oil to rise or threaten national security. Furthermore, there is the wild card of Iran’s oil customers, the most prominent of which is China, which would hardly be inclined to go along with increased sanctions. But one thing should be clear in Washington – however odious the U.S. government might find Iran’s mullahcracy, it is most unlikely to cave in to either economic or military intimidation that would threaten the nation’s existence, and if backed up against the wall with no way out, would just as likely go for broke and use every weapon at its disposal to defend itself. Given their evident cyber abilities in hacking the RQ-170 Sentinel drone and their announcement of an indigenous naval doctrine, a “cakewalk” victory with “mission accomplished” declared within a few short weeks seems anything but assured, particularly as it would extend the military arc of crisis from Iraq through Iran to Afghanistan, a potential shambolic military quagmire beyond Washington’s, NATO’s and Tel Aviv’s resources to quell. It is worth remembering that chess was played in Sassanid Iran 1,400 years ago, where it was known as “chatrang.” What is occurring now off the Persian Gulf is a diplomatic and military game of chess, with global implications.

• Market talk of a French sovereign downgrade continues to do the rounds – Unconfirmed
• German Unemployment Change (000's) (Dec) M/M -22K vs. Exp. -10K (Prev. -20K, Rev. to -23K)
• EU says the commission and member states have submitted amendments for new EU treaty

Don't look now but oil is spiking as the market is finally realizing that the escalation in the Persian Gulf is more than just for show (which curiously was once again set off by Obama establishing a full financial embargo of all Iranian activity on New Year's Eve, leading the Rial to plunge to a new record low, and about to set a brand new scramble for physical gold in the country on the verge of hyperinflation). At last check WTI was up over $2.50 with the market realizing that either Dalio will be right (central banks going into overdrive) or the Iranian escalation will finally pass the trigger threshold, and Brent was over $110. Today's escalation, just as requested by the US, is not another missile launch but a threat by the Iran military to retaliate if the US carrier John Stennis were to once again cross the Straits of Hormuz and return to the Gulf. As a reminder, as of December 23, as was observed by Stratfor before the hacker takedown and reported here, the Stennis was within shouting distance. From Reuters: "Iran will take action if a U.S. aircraft carrier which left the area because of Iranian naval exercises returns to the Gulf, the state news agency quoted army chief Ataollah Salehi as saying on Tuesday. "Iran will not repeat its warning ... the enemy's carrier has been moved to the Sea of Oman because of our drill. I recommend and emphasise to the American carrier not to return to the Persian Gulf," Salehi told IRNA." Which is interesting because considering that the 5th Navy is stationed in Bahrain, i.e., deep in the Gulf, there is no way that the Stennis or other carriers will not come back, meaning what is likely the terminal escalation has now been set in motion.

If we had to summarize the Status Quo's confidence that no black swans will threaten its control in 2012, we might begin with its faith that the system's self-regulation will resolve all systemic challenges. Just as the Status Quo has placed all its chips on a single bet--that "growth" from debt-based consumption can be resumed with vast public borrowing and saving the predatory financial sector--it also bases its confidence on the system's self-regulation. If the banking sector is riddled with fraud and embezzlement, then some minor tweaking of regulation will solve all issues. If demand for debt has collapsed, then the solution is for the Federal Government to borrow 10% of GDP every year to compensate for the decline of private debt and spending. The faith is that extending and pretending will magically restore the "growth" the Status Quo needs to support its ballooning debt. Extending and pretending offers up the compelling illusion that the system's broken self-regulation is up to the task of fixing systemic problems. In the darkness overhead, we can hear the beating of unseen wings that promise to make a mockery of the Status Quo's supreme Imperial hubris.

As expected yesterday, when the US went out full bore with a Japan-lite approach of McCollum-like strategy of leaving Iran no option but to keep escalating until finally the US has enough public support grounds for a response, in under 24 hours Iran has launched a second missile, this time not a medium-range SAM to a long-range shore-to-sea missile. Needless to say, the US 5th Navy is watching these quite welcome developments with great interest. From Reuters: "Iran said on Monday it had successfully test fired a long-range missile during its naval exercise in the Gulf, flexing its military muscle to show it could hit Israel and U.S. bases in the region if attacked. The announcement came amid rising tension over Iran's disputed nuclear programme which Western powers believe is working on developing atomic bombs. Tehran denies the accusation and last week said it would stop the flow of oil through the Strait of Hormuz if the West carried out threats to impose sanctions on its oil exports." At this point it is glaringly obvious to all but the most confused that the US is consistently pushing Iran to escalate further and further, until such time as the US ships stationed in Bahrain say enough and decide it is time to sink some boats.

Traders in the market (what little is left of them) always seek out the investment thesis with the highest upside/downside ratio to a delta in any fundamental forecast. In other words, what derivative play to a secular trend generates the higher IRR? A good example is the ABX which allowed contrarians in 2006 and early 2007 to bet on a collapse in subprime and put on a "short" at next to now cost of carry, with practically no downside if the thesis ended up being wrong, and unlimited upside (just ask Paolo Pellegrini and Kyle Bass). Well, as we just learned, one of UBS "surprises" for 2012 is that oil could drop below $70/barrell. Is this possible? Absolutely - should the Eurozone collapse, and/or China experience the long-overdue hard landing, a deflationary shock (which will naturally only precipitate the central banks into an even more rapid devaluation of legacy paper currencies) can and likely will send crude tumbling (Iran geopolitical concerns aside) as happened back in early 2009 when crude collapsed to around $30/barrel however briefly. So is there a better option to play crude downside than merely shorting CL? Perhaps one idea with better "upside" in case of a deflationary collapse in crude is to get bearish on Boeing instead. As the following chart from Goldman shows, 3 of the 4 biggest widebody (and thus most profitable) aircraft orders are from Gulf airline companies - Emirates, Qatar and Etihad. Together, they amount to about 450 profitable future orders... which could well be cancelled if Gulf states revert to their panicked state last seen so vividly in the spring of 2009 when they were cancelling orders left and right. 

While one of the bigger commodity funds out there, in this case Fortress Commodities Fund, has not done too hot recently (down 7.4% in October), which it humbly admits to and says, "the month of October was a wakeup call for us and we are adjusting accordingly" here are some must read perspectives that lead the Fortress Commodity group to conclude that "We're Long Gold, Short Base Metals, Patient Crude Strength Seller & Buyer Of Corn On Any Real Flush In Prices." Oh, and that it's "macroeconomic outlook remains pessimistic."

It appears that China has already forgotten its close encounter with inflation as recent as a few months ago leading to assorted riots, and is instead far more concerned with the collapsing housing market. As a result it just announced a 50 bps reserve ratio cut, well in advance of when most commentators thought it would happen, on what is now the start of a monetary policy loosening cycle. The kneejerk reaction is for futures to surge and gold to spike, and crude to pass $100, even as the EURUSD was once again drifting lower overnight. And while this is beyond bullish for commodities, we doubt equities will remain bid unless Europe mysteriously fixes itself overnight too. Which won't happen. More from Reuters: "China's central bank cut the reserve requirement ratio for its banks on Wednesday for the first time in nearly three years to ease credit strains and shore up activity in the world's second-largest economy." Naturally, this ties Bernanke's hand even more as Chinese inflation will now be stoked internally in addition to importing any excess inflation to be generated by the Chairman, likely leading to an even faster spike in global inflation the next time we get US-based quantiative easing. Look for Chinese-based purchases of gold to surge.

JPM, which has been stuck holding on to reflationary assets for months and months expecting a QE3 announcement which keeps on not coming as the market always frontruns it and makes any actual reflationary progress by the Fed impossible, couldn't wait to release today's crude price update following the reversal of the Seaway pipeline. The bottom line: JPM is lifting its WTI forecast to $110/bbl in 2012 and $118/bbl in 2013, and see the Brent-WTI spread narrowing to $5 and $3/bbl in those years, respectively. Previously WTI was seen as hitting $97.4 in 2011 and $114.25 in 2013. Consumers everywhere rejoice as they will have to take even more debt on (never to be repaid of course) in addition to never paying their mortgage payments. As noted earlier, now that WTI is well north of $102, kiss any deflation risks goodbye and with that the announcement of MBS LSAPs. At least until tomorrow's post 3 am European gap down, which will be fully filled and then some in the period between noon and 4pm.

Remember that October "deflation" that was driven by energy prices dropping (as reported 5 mintues ago)? You can forget it. As of seconds ago, WTI just passed $100 for the first time since July 26. This is another $200 billion in GDP that was just taken out. The market forecast now is global meltdowny with chance of QE3: 85/95%. And in fundamental news, Enbridge and Enterprise announced they would reverse the direction of crude oil flow from Cushing to the US Gulf. Hardly bearish for WTI prices and will likely lead to an even faster compression between Brent and WTI.

The last month has been a violent one for stock and bond investors but a look at the forward curve for Crude Oil also tells a story of hugely volatile moves. Oil has shifted from contango to backwardation in the last month but it is today's dramatically disconnected move that has many scratching their heads. As we approached the European close today, oil started to rally and rally fast. Initial rumors of ECB printing were quickly dismissed as gold and silver slid back but crude kept going - all on its own. After being perfectly in sync with BTPs for the last few days, we wonder if traders were short oil as their hedge against European long risk exposures and the LCH margin call forced liquidations and unwinds - idiosyncratically cracking the oil market back over $97.50.

Commodity prices have certainly been volatile in the last few days with near-record-breaking upside shifts in some. Copper's extravaganza in the last two days was discussed earlier but it is the huge shift in the whole WTI crude complex that is perhaps more fascinating. For the first time since May 2011, Dec 11 WTI is more expensive than Dec 12 and in the last three trading days alone, the entire curve has shifted to backwardation very aggressively. This inflation-prone signal, and much chatter among Fed talking heads on 'helping' the Europeans, could perhaps help explain the strange 'strength' in the EUR as it and the USD circle the drain of fiat currencies. Gold has obviously yet to get going, but today has broken $1660 (up over $50 in the last few days).