Crude

Has the time, when the end of QE is ultimately priced in, finally arrived? Following another steep sell off in silver, matched only by the decimation in Chinese stocks, it appears margin calls have finally come to crude, which just plunged by $2 in seconds. And if the answer is yes, is this the expected rotation from the inflationary to deflationary mood which is so very critical for Bernanke to launch his third and final QEasing episode? Expect a major spike in real vol (not VIX) here if we have finally come to the inflection point.

And so once again rumors of silver's demise appear largely exaggerated: after plunging 15% last night, getting all the top callers to once again proclaim victory after having been wrong for the good part of about one decade, silver has since retraced a key Fib level and has now recovered over two thirds of the drop. At this rate, at least a few more margin hikes will be desperately needed today to throw all available speed bumps in the path of the unstoppable metal. In the meantime as expected last night's forced plunge was a gift for anyone who bought at $42 and has made over 10% already. Elsewhere, crude is approaching $115, after hitting $110 overnight. So much for the bin Laden inverse rally in commodities.

From Reuters: SYRIA'S MUSLIM BROTHERHOOD MOVEMENT CALLS ON SYRIANS TO TAKE TO STREETS TO DEMAND FREEDOM - DECLARATION ISSUED AHEAD OF FRIDAY PRAYERS .

And so it just became religious.

As we start this new year, a number of events are likely to occur along with the normal changes in the weather. January gasoline is typically the lowest in any year and, despite the common mythology, gasoline consumption does not normally fall steeply after Labor Day and then recover miraculously after Memorial Day. We do see an element of driving disappear after Labor Day, as drivers in the 16 to 25 year-old age bracket tend to drive less, or at least more predictably. Family vacations are also over by that point, as a general rule. But, there are pockets of demand during foliage sighting season and Thanksgiving Weekend is always the best four-day driving period in any year in which July 4th does not fall on a Tuesday or Thursday. There is usually good driving through the month of December into New Year’s Eve, but it traditionally falls off a cliff right after the champagne glasses touch to ring in a new year. People park their cars and drive to work and school and to appointments. But it is not until March or April that more discretionary driving normally returns. Refineries know this and they typically plan maintenance turnarounds from January through April or early May. During this period, there is a definite tendency for gasoline inventories to be drawn down; even though demand starts the year at its lowest levels, the maintenance usually goes on long after demand has started to mount a comeback.

All those who listened to Goldman and sold their oil exposure (to Goldman) may not be delighted to know that WTI is now trading at a higher price than where Goldman advised all their oh so precious clients to dump the black gold. As a reminder on April 12 Goldman released one of three bearish reports on oil expecting brent to drop to $105. In the meantime, cause a sell off in the energy complex. Seven trading days later, those who shorted on Goldman's advice, are now underwater. In the meantime we look forward to Goldman reporting another flawless trading quarter in their Q2 10Q some time in July. Of course by then Goldman's "transitory" deflation bias will be long over.

As if the implied US downgrade was not bad enough for ostritches whose heads are infatuated with sand, here comes JPM's Lawrence Eagles destroying the myth about crude demand destruction, so aggresively spun by a flaiiling Saudi Arabia which can not afford to admit that the only reason it can not hike production is because it is already at capacity. From JPM: "Our refinery activity projections show that crude throughput (demand
for crude) will rise by at least 2.7 mbd between now and August, and
will need to be much higher to avoid a steep second half 2011 product
stock draw. Minister al-Naimi’s comments imply OPEC March production
at below 28.4 mbd, and thus a steep increase in supply will be needed
over the coming months to meet our estimated 29.7 mbd call on OPEC in
3Q11. The reality is that following a supply shock, the oil market can
sometimes need wider than normal differentials to trigger the economic
adjustments. If supplies are not increased decisively for June liftings be prepared for price spikes over $130/bbl." Translation: $5 gas average prices are now virtually an inevitability.

For those curious what the half of life of not one, not two, but three consecutive Goldman crude downgrades is these days, the answer is - three days. It finally appears that the broader public is well-aware of just how business is done at 200 West. To all those who sold despite our warning that this is merely a shake out of the trembling hands, better luck next time. On the other hand, the squid, unlikely to accept defeat at buying crude at lower prices courtesy of panic sellers, will most certainly continue its onslaught against those who refuse to part with actually valuable assets and proceed with converting commodities into an infinitely dilutable and totally worthless combination of 75% cotton/25% linen.

Now that it is proven that even Goldman commodity downgrades have a half life of 2 days, here come the exchanges. In a move that would surprise exactly nobody, the CME announce at close of trading that it is hiking the initial and maintenance margins for Crude, WTI and Brent Tiers 1-6 anywhere from 6% to 15%. Curiously, the CME is concurrently lowering margins on a variety of natgas, gasoil and crack futures contracts. Still, the move begs the question: why did the CME not hike margins when WTI and Brent were trading about 4% higher is unclear. What is clear is that the ongoing attempt to kill the "speculators" who are solely responsible for the surge in crude prices (and not the Fed, never the Fed) will continue. As we have been saying, prepare for more deflationary downgrades of all asset classes by Goldman, especially if this latest margin hike has the same effect it has had over the past several months: none.

As part of Goldman's second hit piece in oil which the cynically inclined could interpret as merely providing Goldman with an attractive entry point to being long crude, David Greely cites supply-demand fundamentals which supposedly are "less tight." This is great. It would be even greater if it was based on fact. Because according to the IEA "crude output fell by around 890,000 b/d in March as other member states failed to make up for a sharp drop in production from conflict-riven Libya." For those unfamiliar with the lingo, this translates as follows: i) supply fell (which anyone who has taken Econ 101 is aware what it means to equilibrium price, especially ahead of Japan's imminent massive oil restocking to replace nuclear power plant capacity), and ii) Saudi Arabia was lying about its spare potential capacity. "The IEA estimated production from Saudi Arabia in March at 8.9 million b/d, unchanged from February." Yes, this is the country that was screaming from the rooftops that it would hike oil output immediately if not yesterday (since buying the eternal adoration of our citizens does not come cheap). So, we ask Mr. Greely, does he care to revise his thesis about relative "tightness" - perhaps he could phrase his point alternatively: "some of our traders would love to buy up Brent on the cheap so please sell to us post haste?"

With oil once again supposedly doing a headfake on the second round of Libyan peace reports (remember when Hugo "Peacemaker" Chavez was going to usher in a new era of world peace?) here is Stratfor with a much needed analysis beyond just the headlines, of the real and very deep obstacles to a ceasefire in Libya, which may pour some water over the next attempt at spinning a "give ceasfire a chance" meme, which as we predicted yesterday will last at most a day or two. As for our comment that Goldman is now merely loading up on oil, well: we were right. Following the closing of Goldman's Top trade of 2011 which told GS clients to sell Crude, Copper, Cotton And Platinum who do you think was on the other side of the trade?

Wondering what just took the carpet from under the commodity complex? Heeeeeere's Goldman.

I love/hate when things line up like this.

The strategy of Mutual Assured Destruction has worked so well in the "developed" world (thank you Hank Paulson, Tim Jeethner, Clearinghouse Association et al), it is time to see it in application in the "developing." In an attempt to preempt US doubts about intervening (on the proper side) in the case of escalations in Saudi Arabia (and with the possibility of Yemen becoming a potential Al Qaeda hotbed rising by the hour, this is non-trivial) the former Saudi oil minister Sheikh Zaki Yamani told Reuters on Tuesday that "Oil prices could leap to $200 to $300 a barrel if Saudi Arabia is hit by serious political unrest." We are confident he was merely talking in a very, very hypothetical scenario. After all why scaremonger in a world in which everything is under control?

Another "War On, War Off" day results in huge pain for all those who had expected oil to finally trend lower. Instead, the schizophrenic market decided to finally read the headlines from the past 3 days confirming that K-Daf is winning the war against Libyan rebels, even without an airforce, and despite the US' not so secret anymore CIA involvement, which among other things is likely funding and arming Al Qaeda. The end result was crude surging by nearly $3 intraday to the highest closing since August 2008, and Brent almost at $120 again while at the same time guaranteeing nosebleed(ing) inflation in Europe now that gasoline is on its way to $10/gallon. Within a day we will see just how serious OPEC was about that $120/barrel limit before it increases output, especially since it is now known that most of that excess capacity is a myth. What is far scarier, is that the annualized growth rate in Brent is higher since the Jackson Hole speech (at 127%) compared to the rate of rise entering into the Great Depression (104.25%) when the world had to blow up to bring energy prices lower. In other words, the Fed is once again back in the box where it needs to create a massive market crash to put energy prices back in their "deflationary" place.

The situation in Bahrain is going from bad to dire. Earlier, thousands of protesters marched to the Saudi embassy in the Bahraini capital, angry at the intervention of Gulf Arab forces. 1000 Saudi troops had rolled into the country at the request of Bahrain's Sunni rulers. As Reuters reports, and as Zero Hedge discussed extensively before, the troop movement could signify Saudi concern that any concessions in Bahrain might inspire the Kingdom's own Shi'ite minority. Earlier on Tuesday, the Bahrain King declared martial law as his government struggled to stop the protests. The three month state of emergency hands power over to Bahrain's security forces, which is dominated by the Sunni Muslim elite. Injured were taken to hospital as violence continued in the small Gulf island. "We came out of the tunnel and they started shooting at us and I got injured here, in the back." An opposition politician said one man was killed and several wounded in clashes with police in the Shi'ite area of Sitra. But the biggest news, that which caused crude to just jump by a dollar, is that the Iran President has called the actions by the Bahrain government "unjustifiable and irreparable." And if or rather when Iran gets involved on the basis of a religious escalation, watch out for global stagflation.