Crude

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.

It is no secret that Zero Hedge follows every utterance by Goldman Sachs (Morgan Stanley, not so much - it is sad just how irrelevant MS has become when it comes to swaying any opinion at all) as pertains to the firm's outlook on various commodities, simply because by the very nature of the firm's trading operations, whereby its prop desk (yes, Goldman's prop desk is alive and well) controls a substantial amount of the actual commodity outstanding (in either paper or physical form) and then advises clients to do the opposite of what the firm itself is doing. In essence: using its economy of scale (or monopoly, however one wishes to define it), Goldman can sway the market this way and that with one simple "client" note. The recent fiasco whereby Goldman downgraded Brent in April only to upgrade it in May using the very same assumptions, is nothing more than just the latest example of what we have claimed over and over is outright market manipulation. Today, we find we are not alone after Oppenheimer's Fadel Gheit accused the firm of precisely the same thing on Bloomberg TV: "Whether or not they are influencing the market and manipulation could be
a stronger word, but they are influencing the market. They are doing
things that could be beneficial to them but harmful to the rest of us.
That is where government comes in and says stop, enough. You have a
Ferrari or a Maserati and can go 120 mph, but guess what? Those of us
who can only go 60 miles per hour will be pulverized. That is where the
government has to come in and say there is a speed limit here, but that
is not happening." Of course, if Oppenheimer was large enough and influential enough to do what Goldman does, we are 105% confident Fadel would be singing a totally different tune.

Anyone remember that rapid succession of brent downgrades by Goldman last month which did nothing until the CME and the administration launched an all out war on speculators a relentless barage of crude margin hikes? Well, uber momo Goldman sure doesn't. Just out from David Greely: "While near-term downside risk remains as the oil market negotiates the slowdown in the pace of world economic growth, we believe that the market will continue to tighten to critical levels by 2012, pushing oil prices substantially higher to restrain demand. Events in the Middle East and North Africa are having a persistent impact, which leads us to increase our oil price targets We expect that the ongoing loss of Libyan production and disappointing non-OPEC production will continue to tighten the oil market to critically tight levels in early 2012, with rising industry cost pressures likely to be felt this year. We are now embedding in our forecasts that Libyan production losses will lead to the effective exhaustion of OPEC spare capacity by early 2012. Consequently, we are raising our Brent crude oil price forecast to $115/bbl, $120/bbl, and $130/bbl on a 3, 6, and 12 month horizon." Welcome back volatility. CME petroleum product margin reduction in 5...4...3...

Contrary to conventional wisdom, America does not import the bulk of its crude from the volatile middle east region, but from its sleepy and unremarkable northern neighbor (by a factor of two compared to the second largest source of crude). Which is why the recent eruption of pervasive wildfires in Alberta, which have substantially disrupted production, probably should have far more of an impact on crude risk perception than what happens to 2 million of daily crude output out of Libya, most of which does not even reach the US. From Reuters: "Canadian heavy crude prices have changed little despite wildfires raging in northern Alberta and forcing production cuts, showing there is plenty of supply in storage, market sources said on Wednesday. Western Canada Select heavy blend for June delivery fetched around $17.30 a barrel under benchmark West Texas Intermediate crude, close to levels of a week ago. Dozens of forest fires that have spread in recent days have led to the shutdown of more than 100,000 barrels a day of output in the north-central Alberta region, most of it due to the outage of the 187,000 barrel a day Rainbow pipeline. The southern leg of the line, operated by Plains All American Pipeline LP, was shut due to the blazes. The northern leg has been out of service since a rupture and oil spill in late April." Perhaps the reason why none of this is perceived as a risk is that for about a decade now neither supply nor demand have actually been factors in determining equilibrium prices, which in turn is defined almost exclusively by the amount of free liquidity in the system, and correspondingly, speculator, and margin, scapegoating.

Following various outright margin hikes in commodities such as precious metals and crude, the CME is now moving on to swaps and other interproduct and intraproduct contract pairs. As of a few minutes ago, the CME just hiked the CL intraproduct spreads Tier 1 through 6 for both New and Initial Margins by about 33.3%, and assorted other CL pairings by a lower amount. It also did the same for a variety of RBOB contract intraproduct spreads by a comparable amount. Curiously, intercommodity spreads actually declined between gold, silver and copper pairings by anywhere from 10% and 20%. For now the market appears not to be reacting to this latest margin move by the CME.

With the record retreat in crude oil prices, many consumers are expecting big retail price drops by Memorial Day weekend. But this time around, the decoupling of gasoline and crude oil would mean gasoline prices may be harder to drop.