Crude Oil

If we had to summarize the Status Quo's confidence that no black swans will threaten its control in 2012, we might begin with its faith that the system's self-regulation will resolve all systemic challenges. Just as the Status Quo has placed all its chips on a single bet--that "growth" from debt-based consumption can be resumed with vast public borrowing and saving the predatory financial sector--it also bases its confidence on the system's self-regulation. If the banking sector is riddled with fraud and embezzlement, then some minor tweaking of regulation will solve all issues. If demand for debt has collapsed, then the solution is for the Federal Government to borrow 10% of GDP every year to compensate for the decline of private debt and spending. The faith is that extending and pretending will magically restore the "growth" the Status Quo needs to support its ballooning debt. Extending and pretending offers up the compelling illusion that the system's broken self-regulation is up to the task of fixing systemic problems. In the darkness overhead, we can hear the beating of unseen wings that promise to make a mockery of the Status Quo's supreme Imperial hubris.

Traders in the market (what little is left of them) always seek out the investment thesis with the highest upside/downside ratio to a delta in any fundamental forecast. In other words, what derivative play to a secular trend generates the higher IRR? A good example is the ABX which allowed contrarians in 2006 and early 2007 to bet on a collapse in subprime and put on a "short" at next to now cost of carry, with practically no downside if the thesis ended up being wrong, and unlimited upside (just ask Paolo Pellegrini and Kyle Bass). Well, as we just learned, one of UBS "surprises" for 2012 is that oil could drop below $70/barrell. Is this possible? Absolutely - should the Eurozone collapse, and/or China experience the long-overdue hard landing, a deflationary shock (which will naturally only precipitate the central banks into an even more rapid devaluation of legacy paper currencies) can and likely will send crude tumbling (Iran geopolitical concerns aside) as happened back in early 2009 when crude collapsed to around $30/barrel however briefly. So is there a better option to play crude downside than merely shorting CL? Perhaps one idea with better "upside" in case of a deflationary collapse in crude is to get bearish on Boeing instead. As the following chart from Goldman shows, 3 of the 4 biggest widebody (and thus most profitable) aircraft orders are from Gulf airline companies - Emirates, Qatar and Etihad. Together, they amount to about 450 profitable future orders... which could well be cancelled if Gulf states revert to their panicked state last seen so vividly in the spring of 2009 when they were cancelling orders left and right. 

A month ago we presented the strange case of the fractal algo gone amok while trading natural gas in a low volume after hours session. We expected that we would see this surreal trading pattern in other commodities shortly, although little did we know that it would impact the most important of them all, as soon as month later, and during peak trading hours. As the chart of CL EQ1 below shows, not even crude is safe any more from this aberrant trading algorithm which has now infected, it is safe to say, virtually every product. If NYSE Boerse's Duncan Niederauer is really confused about what is causing retail investors to depart in droves out of pure disgust with what are terminally manipulated markets (and not just stocks), we hope this chart provide at least a few clues.

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.

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.

Japan's 9.0 earthquake is most likely a non-event for the crude oil, but the nuclear power basically has met its Deepwater Horizon.

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.

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.

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....

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.

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.