Crude

The CME Group Inc. increased margins its New York Mercantile Exchange crude oil and petroleum products futures, effective after the close of trading today. The margin for Nymex crude oil will rise to $6,750 per contract from $6,075, while heating oil margins increase to $6,413 from $5,063 and gasoline to $6,750 from $5,400, the exchange said in a notice late yesterday. The attempts to prevent an out of control melt up in the one product everyone is terrified of, crude, are back on the table. Just like last week, when the ICE started and the CME followed suit, look for today's CME action to be promptly immitated by the ICE on Brent.

With crude prices bid up so much, traders are left with a dilemma - to be in the crude oil trade, players basically either have to take delivery, or rollover.

While the equity market resumed its now traditional (for the past 6 months) smooth levitation, with little to no volatility and even less volume, the most interesting asset class was silver, which after dropping to under $32 yesterday, following the various attempts by the administration to kill assorted commodities, rose by 4% today, closing at the day's highs and wiped out the entire loss from yesterday. Ironically, this happened even as general collateral rates rose today. "The reason for the rise is an increase in the volume of Treasury securities available to be used in the repo market as general collateral. The Treasury Department on Friday settled an issue of $25 billion in 49-day cash management bills, and the $99 billion in new notes it auctioned this week will settle on Monday." Of course, this was offset by another 56-Day CMB offsetting the winding down SFP (total SFP holdings are now cut in half to just $100 billion). So despite a major liquidity extraction from the market, not only did stocks rise (which can traditionally be attributed to POMO in a low volume environment), but the biggest beneficiary was silver, meaning that even in a tight liquidity regime, most investors now prefer to pursue commodities as an investment class, something which had not happened previously.

As usual, our Onionesque predictive powers are spot on. Two hours ago, when we reported the ICE margin hike, we stated: "We expect the NYMEX will follow suit on its own WTI contract margin hike any minute." 60 minutes later, this prediction comes true. Per Bloomberg: "CME Group’s New York Mercantile Exchange plans to raise margin requirements on its light, sweet crude oil contract for the first time since March 2009, according to the exchange. Margins for speculators will increase to $6,075 per contract from $5,063, and for hedgers to $4,500 from $3,750, according to a notice on the CME’s website. The change will take place after the close of trading tomorrow." The heavy artillery in crude is out. And while margin hikes do nothing any more for silver and gold, the weak hands in crude have at least two rounds of margin hikes before they are flushed out. Of course, the half life of margin hikes is about 2-3 days. We expect this increase to be internalized very quickly. The next one will be priced in within hours. And the third one will be ignored. After that... who knows.

If anyone is alive after today's utterly insane trading action, congratulations. The volatility lull of the past 6 months is now over: swaption traders rejoice.

Update: U.S. government has no reason to believe that Gaddafi is dead

Just a completely unfounded rumor for now. If it proves false, watch the vicious snapback...

Those following the move in WTI this morning may wonder what the catalyst for the ongoing retracement has been. According to Italian sources (the country most affected by developments in Libya so take it with a grain of salt), OPEC is meeting in Riyadh to evaluate hiking crude supply in light of Libyan developments. This mirrors a less definitive statement issued earlier by the Kuwait oil minister that "OPEC could call an emergency meeting if required by disruption to oil supply due to Middle East unrest." As a reminder after peaking WTI at $98.25, it since pared gains to under $95.75, and was trading at $96.11 last. So while Bernie Bernanke can always print dollars, it is up to OPEC to print oil. And the market seems to be satisfied for now with promises of such.

There was a time, long ago, when the dollar was a flight to safety instrument. Those days are gone. DXY barely budging as the overnight session begins, while silver has already put $34 in the dust. Last: $34.26 and parabolic.

This is not the $104 brent crude you are looking for. Ignore everything and just BTFWW3.

In what can be the "Holy Grail" moment for the peak oil movement, Wikileaks has just released 4 cables that may confirm that as broadly speculated by the peak oil "fringe", the theories about an imminent crude crunch may be in fact true. As the Guardian reports on 4 just declassified cables, "The US fears that Saudi Arabia, the world's largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show. The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%." Could the OPEC cartel's capacity for virtually unlimited supply expansion to keep up with demand have been nothing but a bluff? That is the case according to Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, who met with the US consul general in Riyadh in November 2007 and "told the US diplomat that Aramco's 12.5m barrel-a-day capacity needed to keep a lid on prices could not be reached." And yes, that conspiracy concept of peak oil is specifically referenced: "According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as "peak oil"." And it gets worse: "Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment. He argued that Aramco had badly underestimated the time needed to bring new oil on tap." Look for Saudi Arabia to go into full damage control mode, alleging that these cables reference nothing but lies. In the meantime, look for China to continue quietly stockpiling the one asset which as was just pointed out is the key one to hold, for both bulls and bears, according to Marc Faber.

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.