Crude

When it comes to reporting the news, Reuters ability to get the scoop first may only be rivaled by its ability to "spin" analysis in a way that will make a normal thinking person's head spin.  Such as the following piece of unrivaled headscrathing titled "The good news behind oil prices" whose conclusion, as some may have already guessed, is that "the surge in crude oil is looking more like a harbinger of better days." Let's go through the arguments.

It was only sugar water anyway. 

On Friday, we quantified the biggest losers in the case of a sustained oil price shock, and were not surprised to find that the US leads the way with about a 0.9% hit to GDP for every $10 rise in crude prices (compared to about 0.4% for the entire world). Today, via Goldman we look at the flipside and while acknowledging that in absolute terms the world will suffer should crude prices sustain their move higher, there will be relative winners. From GS' David Kostin: "Our oil convergence monitor tracks the relative performance of the Energy sector vs. S&P 500 against the price of oil (measured by the 2-year oil swap). Currently, Energy equities are about 1.5 standard deviations cheaper then the oil price would suggest (based the relationship over the past three years (see Exhibit 4). The divergence has remained stable during the last two weeks although the Energy sector outpaced the S&P 500 by 160 bp during February (5.9% vs. 4.3%). Outside Energy, the Metals & Mining and Engineering & Construction industries show the highest sensitivity to oil prices." What is strange is that the biggest loser by far to an oil shock is the Consumer Discretionary sector, which continues to plough on, completely oblivious of absolutely everything, even as the Dow Transports have decoupled from the broader market, purely in hope that the iRally will continue and lift all boats with it, when in reality every incremental dollar spent for iTrinkets saps the already tapped out US iConsumer even more, with less marginal purchasing power left for other discretionary purchases. Then again, good luck trying to talk any sense into the central bank playground known as the stock market, which will do whatever it wants for as long as it wants, until it doesn't.

What is one sure thing sure to set triggerhappy warmonger fingers in the US and Israel on Defcon 1 more than the word Iran? The words Iran and North Korea. How about three nouns that will send crude soaring by at least $10 the second a CL trading algo sees them fly across Bloomberg? Try "Iran" "North Korea" and "Nukes." And if the following report just released by the Wiener Zeitung is even remotely correct, then Israel, the military industrial complex, and crude are all about to go ballistic, not necessarily in that order.

The results from Iran's parliamentary election, whose outcome will have virtually no impact on the country's foreign, nuclear or Iran policy, and thus change the country's course vis-a-vis Israel and the US, are in, and following a supposedly high turnout as big as 64% which critics have blasted as a sham (unlike American low turnouts which are 'pristine', yet where both "opponents" end up paid representatives of the banker class) has seen support for president Mahmoud Ahmadinejad's party slide, at the expense of a surge in popularity for the ultra conservative Supreme Leader Ayatollah Ali Khamenei. Reuters summarizes the results as follows: "Interior Minister Mostafa Mohammad Najjar put the turnout at 64 percent after more than 26 million votes had been counted, telling state television the Iranian nation had disappointed its enemies by voting in such numbers. The figure was close to the 65 percent predicted for weeks by hardline conservative leaders and media. Najjar said 135 seats had been won outright so far, with 10 going to a run-off. Final results were not expected on Saturday. According to a Reuters tally of the results announced in 126 seats, 81 went to Khamenei supporters, 9 to Ahmadinejad's faction, 7 to reformists and 7 to independents, with the allegiance of the remaining winners unclear." However, as noted above, "the vote will have scant impact on Iran's foreign or nuclear policies, in which Khamenei already has the final say, but could strengthen the Supreme Leader's hand before a presidential vote next year. Ahmadinejad, 56, cannot run for a third term." Instead, it is all about internal politics and is a buildup to next year's presidential election in which Ahmadinejad can not run, thus opening the door for Khamenei to take all power. Needless to say, if the "western" world thinks the current conservative president is bad, his ultra-conservative replacement will hardly make things better.

Natural gas prices are depressed and expected to remain so for the short to medium term, so investing in natural gas options or a natural gas exchange-traded fund is not likely to bring home the big bucks anytime soon. Domestic natural gas equities are an even riskier idea - most producers are scaling back production and selling assets as they hunker down in preparation for a tough few years. In this case, the way to profit is by understanding how natural gas' changing role is impacting North America's energy machine as a whole. Cheap natural gas is prompting utilities to switch from coal to gas where possible. The confluence of cheap natural gas and a risky global economy has droves of investors turning their backs on green energy, the sector that was such a market darling only a few years ago. Farther down the road, North Americans are debating - and in places implementing - a range of strategies to take advantage of the continent's newfound abundance of natural gas, from natural-gas-powered transport trucks to exportation of liquefied natural gas (LNG). Isaac Newton showed us that for every action there is an equal and opposite reaction. That is why every downside force in the energy sector creates upside opportunities elsewhere. The challenge is finding them. It takes an understanding of the entire global energy machine to figure out what areas are benefitting from the changing landscape.

Over the past 5 months, the only reason the US market, and this economy has outperformed the world (or "decoupled" in the case of so-called US fundamentals) is because the trillions in incremental liquidity from generous central planners have homed in on US equities like a heat seeker, in the process boosting confidence, and in a reflexive fashion, making consumers believe that things are getting better (for producers of printer cartridge maybe, everyone else just keeps getting worse off in real, not nominal, terms). Paradoxically, the trillion plus injected into the system from the ECB, ended up helping not Europe, but the US. However, as every action ultimately has an equal an opposite reaction, the recent US "renaissance" has also sown the seeds of its own destruction, because one of the side effects of a massive liquidity reflation is what has happened in the energy markets where the crude complex trades at all or near all time highs. However, as the following chart from UBS shows, it is the US which has the most exposure to that other side effect of soaring liquidity: surging prices. While the number is fluid (economist humor), every $10 increase in crude prices, cuts US GDP by 1%, and less than that in Europe and the ROW. As noted yesterday and today, "strategists" have already started trimming their GDP forecasts. How long before we end up seeing already weak growth turn negative as a result of the most recent central planning reliquification experiment? Because it will - central intervention always leads to adverse consequences in due course. Only this time, corporate profits will not allow the economy (read the markets) to pull itself up by the bootstrap, as they have topped and are now sliding lower.

European indices are trading in minor positive territory ahead of the North American open with tentative risk appetite. This follows news that the EU leaders have signed off on the EU fiscal pact, with German Chancellor Merkel commenting that 25 out of 27 countries have signed the agreement. The effects of the ECB’s LTRO continue to trickle through as the ECB announce they received record overnight deposits of EUR 777bln from European Banks. Little in the way of data today, however UK construction PMI released earlier in the session recorded the highest rate of increase in new orders for 21 months. In the energy complex, Brent futures have come down below USD 125.00 from yesterday’s highs with WTI echoing the movements, following market reaction to the confirmation that there were no acts of sabotage on Saudi pipelines yesterday, according to Saudi officials. EUR-led currency pairs are trading down on the session, and USD/JPY continues to climb, hitting a 9 month high earlier today at 81.72.

Overnight sentiment is turning south, after 4 successive days of breakout attempts have failed to conquer Dow 13K, and with crude sticky at multi month highs. The EURUSD is down over 100 pips and is testing 1.32 support. BBG summarizes the key overnight events that are shaping the mood: EU leaders, bowing to German demands, signed a deficit-control treaty at the 17th summit since the outbreak of the crisis. The treaty puts tighter  restrictions on spending. A test of Europe’s commitment to austerity will come when the region debates whether to ease the deficit-reduction target for    Spain, which is part of the overnight downbeat mood in stocks after PM Rajoy announced that the deficit target for the coming year is 5.8% of GDP and the 4.4% deficit goal is unattainable. The European Central Bank said overnight deposits soared to  a record after its second allocation of three-year loans. Elsewhere, investors are complaining that the European Investment Bank doesn’t deserve the same exemption from losses on its Greek bond holdings as the euro region’s central bank because it didn’t buy the notes to support monetary policy. Well - don't complain, and merely just say no to the PSI. Treasuries steady; Bloomberg’s Soveriegn Debt Movers shows Greek yields plunging, Portugal slightly higher. European stocks mostly higher, U.S. futures steady. Will this downbeat mood remain - all depends on which way the momentum algos move, and whether they have been recalibrated from the prior program of following crude with a positive correlation.

All you need to read.

The latest in this story:

• Saudi oil officials says reports about attack on pipeline are untrue- Dow Jones
  

So someone is lying. And now we can go back to assuming that Saudi Arabia has limitless excess supplies of crude.

Another update from Arab Digest.

Among the many factors responsible for the jump in WTI to just shy of $109 over the past hour, and Brent to new records in various currencies, is the following news reported so far only by Iranian PressTV: "An explosion has hit oil pipelines in the flashpoint Saudi Arabian city of Awamiyah in the kingdom’s oil-rich Eastern Province." And now back to your regularly scheduled deflation.

Back in September, before the transition from then ECB head J.C. Trichet to current Goldman plant and uber printer Mario Draghi we asked whether "Trichet will disgrace his already discredited central banker career by pushing a rate cut before he is swept out of the corner office by Mario Draghi, or will the former Goldmanite Italian become the most hated man in Germany soon, after he proceeds to ease, even as Germany still experiences Chinese inflationary re-exports. The answer will be all too clear in just a few months." Sure enough, following a whopping €1 trillion in incremental liquidity released by the ECB in the three shorts months since Draghi's ascension on November 1, all under the guise that the ECB is not printing when it most certainly is, albeit "hidden" by the idiotic claim that it accepts collateral for said printing (what collateral - Italian and Spanish bonds, which will become worthless the second even more printing is required in a few short months? This is run time collateral that can be issued "just in time" to convert it to even more cash as UniCredit did again today), the answer is becoming clear. Slowly but surely the realization is dawning on Germany that while it was sleeping, perfectly confused by lies spoken in a soothing Italian accent that the ECB will not print, not only did Draghi reflate the ECB's balance sheet by an unprecedented amount in a very short time, in the process not only sending Brent in Euros to all time highs (wink, wink, inflation, as today's European CPI confirmed coming in at 2.7% or higher than estimated) but also putting the BUBA in jeopardy with nearly half a trillion in Eurosystem"receivables" which it will most likely never collect.

Silver as ever outperformed gold yesterday and traders attributed the surge to “massive fund buying” and to “panic” short covering. Some of the bullion banks with large concentrated short positions covered short positions after the technical level of $35.50/oz was breached easily. Massive liquidity injections and ultra loose monetary policies make silver increasingly attractive for hedge funds, institutions and investors. This time last year (February 28th 2011) silver was at $36.67/oz. Two months later on April 28th it had risen to $48.44/oz for a gain of 32% in 2 months. There then came a very sharp correction and a period of consolidation in recent months. Silver’s fundamentals remain as bullish as ever and the technicals look increasingly bullish with strong gains seen in January and February.