Crude

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.

Crude closes above $80 yesterday for the first time since May. However, a look at some fundamental and macroeconomic signals showed crude oil could be under increasing pressure, thus range-bound, through the rest of this year.

[1] The S&P 500 meets key trendline resistance on day 55 of a Fibonacci time cycle as exponential moving averages cluster ... [2] daily, weekly and monthly support / resistance levels for the US Dollar ... [3] Crude Oil futures trace out a tricky wedge formation

Nice stuff ...

Copper and crude oil are both base essentials heavily reliant upon by economies globally for everyday usage, with no meaningful substitution options. Gold, on the other hand, is not as essential to keep the everyday world running seamlessly, and could conceivably be substituted by other commodities with a change in global monetary standard or people’s perception. From that perspective, I think there are a few recent trends pertaining to crude and copper that are being misinterpreted.

After reading a Zero Hedge article on crude oil futures earlier today I was motivated to write something on the topic. I have been railing against the securitization of the oil futures market for some time. It’s nice to see someone else sharing those sentiments. Below are some notes I jotted down after reading the article.

I do have to agree that for 14-15 months, almost without interruption now, and since August, 2007, more generally, that the Nymex crude oil contract has too often been used as a surrogate for the economy, the DJIA or currencies, most notably the euro. However, last week’s sharp decline may have severed the relationships, at least temporarily. - Peter Beutel, Cameron Hanover