Crude

Once again someone forgot to tell gas station operators that the CME is doing all it can to generate a feedback loop which kills commodity prices and general price stability (price plunges, vol surges, leading to margin hikes, leading to more plunges, leading to even more vol and even more margin hikes, etc). After gas prices rose by about a cent yesterday, the rise according to AAA continues, with average gas prices on the verge of a post 2008 high, even as crude prices have taken a nearly $20 hit in the past two weeks. Yesterday the average regular price was $3.984, up from $3.962 yesterday, and unchanged from a week ago.

Today is shaping up to be an identical replica of the action from last Thursday as seen on the chart below. That's two flash crashes in less than a week. Whether this is driven by another margin hike known only to the CME and its closest, or due to news from Reuters that 17 senators have written to the CFTC to immediately crack down on excessive speculation in crude oil, is unclear, and largely irrelevant. The outright campaign to stomp out any non-stock trading is in full force. The message is clear: the only place where investors can henceforth put their money in is in stocks.

When we presented the first casualties emerging from last week's crude crash we predicted that in addition to Clive and Astenbeck, many more would soon crawl out of the woodwork. Sure enough, the WSJ discloses that London-based, $2.4 billion BlueGold commodities hedge fund is so far the winner in the loser category, dropping a whopping 20% so far in May, and once again confirming that in a market that only goes up, hedging is for wimps. This is the firm's worst downturn ever. But even the shellacking experienced has done nothing to dent the firm's conviction that fundamentals, once margin hikes and other "risk mitigation" features come and go, are as strong as ever. From the WSJ: "Despite the upheaval, the firm, led by Pierre Andurand, is exiting few positions, according to someone close to the matter. He remains bullish on oil prices, predicting that oil could hit a record $180 a barrel over the next few years, according to this person." This is all fine, but we keep banging our heads over this simple question: Just how will Joe Lavorgna be able to spin $180 oil as bullish for the economy?

And crude jumps to pre-margin hike levels. But please don't be too hard on the CME Herr President (in keeping with the whole "Weimar" theme). After all, it took them 5 consecutive tries to kill silver. We expect at least the same number before we get crude back to a price where China can wave it all in for pennies on the dollar.

Some brilliant Chicago-based exchange apparatchik just ask himself this simple question: "If it worked so well with silver, why not do it with crude?" The answer is here: the CME, as we predicted last week, just hiked initial and maintenance margins on Crude and Brent by 25%, as well as FX, and other petrochemicals. And, oh yes, this is prudent risk management, because while the CME kept margins flat when WTI was at $115, the massive spike from $97 to $102 is unbearably destabilizing. At this point one can only stand back and watch as the CME proceeds with hike after hike, in an absolute vacuum from the administration, which certainly had nothing to do with this decision. And really who cares: free capital markets died on March 18, 2009.

A tremendous report by Reuters' Matthew Goldstein, Svea Herbst, Jennifer Ablan, Emma Farge, David Sheppard, Claire Milhench, Zaida Espana, Robert Campbell and Josh Schneyer, identifies that while the shaky macroeconomic conditions and an overbought market were among the key reasons for last week's history crude rout, the match that caused an unseen before plunge in commodities was, you guessed it, "computers." Naturally, this is not unexpected to Zero Hedge readers who have been warned about the massive instability of a market comprised almost entirely of unsupervised algos, since the spring of 2009 (a phenomenon which the CFTC and SEC will not "comprehend" and/or change, until it is too late). Additionally, in addition to the previously identified losses at Clive Capital and Andrew Hall's latest plaything, Reuters also identifies BlueGold, Winton Capital and FTC. Basically, throw out a name that has energy exposure (let's not forget Touradji or Centaurus) and you likely have a winner. Must read.

And another huge hit to future oil supply. After Goldman released a report on Friday, backtracking on its April recommendation that clients sell crude, instead warning that "critically tight supply-demand fundamentals" will likely cause oil prices to "return to or
surpass the recent highs by next year", "should Libyan oil supplies remain off the market", which it now appears they will considering Gadaffi is winning the Libyan civil war against the West-backed rebellion, here comes a stunner out of Iraq which has just slashed its 2017 oil production estimate from 12 million barrels to just 6.5-7 million bbpd. Oddly enough, Iraq is being rational: "Baghdad believes it would not be in its interests to try to achieve the
12 million target by 2017 because boosting global supply would depress
prices." Who would have though a cartel would think of itself first... Surely, this is great news for Saudi Arabia which will promise to hike oil production and replace the missing output only for it to be discovered a few months later that not only did it not to do that (as we just discovered now following the whole Libya fiasco), but that it just does not have the excess capacity. And, of course, "speculators" will be blamed once they take WTI from $97 to $140 daring to discount the future price of oil in a (inflationary) world in which demand increases by 50% over a decade, even as supply continues to trickle down with each passing year. In other words, the CME margin hike crew is actively studying how many margin hikes it will take to break the back of the recently record number of non-commercial net specs... for at least a week or two, especially once the Chairman goes to town with the printer Turbo button. And elsewhere, the upcoming scarcity of lubricating petroleum byproducts is about to be felt through the entire supply (and demand) chain.

And so the margin hike rumor mill shifts from silver to crude. Pretty soon nobody will dare to invest any capital in commodities (or FX) for fear of an imminent 100% margin spike by the exchanges, causing the S&P to trade at 100x P/E, and letting China buy up every commodity at a 50% off. Another brilliant ploy to preserve the wealth effect while not accounting for any possible side effects of Printocchio's actions.

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.