Crude

Crude oil spiked on the news of the uprising in Eqygp with the North Sea Brent at almost $12 premium to the U.S. WTI. Read about why and outlook here.

Something is spooking the reflation trade. While both gold and silver have moved decidedly higher in the past hour, little compares to the fireworks in West Texas, where crude has just gapped up a solid dollar, in what briefly appeared to be an offerless market. Furthermore the move seems contained to WTI: the move in Brent is far more cool and collected, although will likely soon follow and pass the $100 barrier. And while the disconnected between the two (north of $5 recently) has been well noted, if not completely understood, the sudden move in WTI does not seem to have an immediate catalyst: the all critical Chinese CPI/GDP/retail data is not due until tomorrow, so either someone is trying to start a HFT algo melt up in various futures markets, or fat fingers (soon to be denied) are far more prevalent than previously expected.

Since the start of the New Year, West Texas Intermediate (WTI) crude oil have been moving with significant bearish sentiment. However two new events that could disrupt supply worse than Hurricane Ivan will likely turn the momentum aournd very quickly....

With the value proposition of sell-side research now completely gone, as most of it has become merely a conduit for shot gun propaganda (is there even one sell on Goldman's most recent conviction list?), third party research shops such as Credit Sights are promptly becoming the only objective and impartial sources of analytical insight.  In its January 3 market commentary Credit Sights shares the first semi-official view of the adverse consequences to the economy should the current liquidity surge from the Fed not be moderated (and with such pundits as Fred "Dynamite" Mishkin telling Bloomberg earlier today that QE3 will not come, it is guaranteed that QE3 is imminent). In a nutshell: "a rising oil price creates economic headwinds via numerous channels
particularly if the increase is sudden. A decline in disposable incomes,
reduced consumer confidence, lower levels of travel, a decline in
demand for gas-guzzling larger autos and an upward bias to inflationary
expectations are all spin off effects on the consumer of a rapid ascent
in the price of oil." Which is why as liquidity continues looking for paths of least resistance, and finds them in such places as commodities (especially now that China has all but shut down the door to importing US liquidity) it is precisely the risk of a price spike in crude that is rapidly becoming the biggest risk to the "wealth effect" derived from the continued lunacy out of the Fed.

Just in time for Christmas, On Wednesday, Dec. 22, U.S. gasoline prices hit an average $3 a gallon for the first time in more than two years, according to AAA's Daily Fuel Gauge Report. Meanwhile, U.S. stocks and oil also climbed to the highest levels since 2008.

A few days ago, when oil was pushing on $89 we said that we expect oil to pass $100 in a few weeks, now that chasing returns in stocks is beyond ludicrous, and speculators are branching out to those commodities which have not yet been cornered by the JP Morgue, although we are confident the Masters brain trust is plotting and scheming how to create a synthetic security that allows crude to hit $150 as RBOB goes negative. As of a few minutes ago, WTI has just passed $91, which for those who have taken math means that $100 oil is less than $9 away. And as a reminder, every $1 rise in oil reduces US GDP by $100 billion, just as every cent increase in gas prices lowers disposable income by $600 million. Who would have thought that trillions in binary dollars just sitting there, unused, unwanted, doing nothing but taking up EEPROM space could possibly have an inflationary impact...

After WTI passed the $90 barrier with firm determination, as we highlighted earlier, the most recent DOE Crude Oil Inventories number confirms that the far larger than expected draw down is accelerating. As readers will recall, after last week's massive drawdown of 9.854 million barrels which was the largest in 9 years, today's number was another stunner, coming in at 5.333 MM on expectations of 3.4 MM. The result: WTI spikes and is last seen at $90.64. And as a reminder every $1 rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in gasoline decreases U.S. consumer disposable income by about $600 million per year. The move in oil in the past week alone has almost entirely wiped out the most recent stimulus. Furthermore, as we suggest earlier, now that $90 is in the history books, $100 is coming, and may be here within a few weeks. At that point Bernanke may have some problems explaining how he is "100% confident" that the surge in gasoline prices is completely and totally not as a result of his deranged genocidal tendencies.Don't worry though, hedge fund managers around the world will be more than happy to afford the surging prices. Remember: wealth effect!

As West Texas Intermediate is now holding steady over the psychological barrier of $90, more speculators will shift their attention to this latest commodities market, which rumor has it has not been cornered by JP Morgan just yet. As Bernanke's liquidity gushes with no sign of stoppage, expect to see a prompt move into triple digit territory here. For those seeking a good overview of what is happening in he crude space, we provide the following summary note from FMX connect...

Following the earlier news from the DOE of a crude drawdown 4 times greater than expected, WTI has exploded by over $2 in the last two hours, and is once again threatening to take out the important $90 psychological barrier. What is the impact of this on the US economy? Oh just $200 billion in GDP. With a minus sign in front: "every $1 per barrel rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in gasoline decreases U.S. consumer disposable income by about $600 million per year." And so, a substantial portion of the "benefit" from middle class tax cut extension has been eliminated almost entirely in just under 2 hours.

Despite the recent price surge in crude oil this week--thanks mostly to a Fed's QE2-induced weak dollar, the fact is that crude inventory levels are actually sitting at the highest in 2010. This, plus other market factors coud pressuure crude prices to trade back down around the $75 to $85 range.

Once again we find some strange activity occurring in these markets from a trading perspective, and it is time that the increased staff and resources of the beefed-up CTFC enforcement division look into crude oil and silver markets, in particular.

Due to the abundance of inventory and supply, crude has remained range-bound, and started to decouple and underperformed other commodities, as well as equities. While high stocks level traps crude, the dollar weakness, on the other hand, has prompted some OPEC members to support $100 oil.

The rush back into commodities after the jobs report indicates that this inflation trade still has some major support and legs by investors.

Last week the shorts were all lined up for another bearish inventory report for Petroleum products from the EIA, but lo and behold, miracles do actually occur.

The Structure of Crude Oil,including Contango and Options Skew, provides options and futures traders unique opportunities to limit risk and initiate positions with excellent value.