Crude Oil

Bernanke today testifies on monetary policy before the House Financial Services Committee (formerly the Humphrey-Hawkins). The testimony will be released at 8:30 am NY with Q&A after his testimony. Tomorrow he testifies before the Senate Banking Committee but the prepared remarks are the same for both days. Indeed it’s likely that the Q&A will be where all the fun starts. As DB says, he will likely try to pull off the trick of continuing to prepare the groundwork for tapering but try to give bond markets something to help them fight off the pressure of higher yields. With no post-meeting press conference planned for the July 30th/31st FOMC, and Bernanke not scheduled to speak publicly until he appears at the Global Education Forum event on August 7th, this week’s testimony may well be the only remarks we hear directly from the chairman for some weeks.

The last two weeks oil inventories fell by a record 20 million barrels, this event has never happened in 30 years of historical data.  Something just doesn`t add up here...

Do not worry, we are told on a daily basis, the rise in crude oil prices is transitory and won't affect gas prices and implicitly the US consumer's pocket book (already ravaged by spiking mortgage rates). Well, sorry to burst that little fantasy but gas prices in the last few days have surged (up 9c in 4 days). In fact today's jump is the largest in six months and pushes regular close to its all-time high for this time of year. Arguing not to worry as gas prices are more sensitive to Brent is a non-starter as it is very evident, despite the export of WTI, that gas prices are tracking the higher prices of crude oil and if history is any guide - with regard the lead-lag from crude to wholesale gasoline to retail, gas prices will be at new all-time highs for this time of year within the next month.

It looks as if China’s days of double-digit economic growth are well and truly over (at least, for the moment). Data that will be released next week (second quarter figures) will show a quarter-on-quarter slowdown that is setting in now for China’s gross domestic product. The figures will be issued on Monda

• Summers Said to Show Interest in Fed Chairmanship After Bernanke (BBG)
• Obama Tells Chinese He’s Disappointed Over Snowden Case (BBG)
• Texas Threat to Abortion Clinics Dodged at Flea Markets (BBG)
• A Peek at Trucking Data, and Then the Stock Surged (WSJ)
• China cuts growth target… or does it? (FT) - yes, it does, net of goal seeked Random () of course
• China Official Suggests Tolerance for Lower Growth (WSJ)
• Disney Says Wristband Boosts Sales in Disney World Test (BBG) - next up: implanted RFID chips
• Spain Prepares Cuts in Renewable-Energy Subsidies (WSJ)
• Bernanke Departure With Duke Heralds Cascade of Fed Appointments (BBG)

WTI crude oil prices have jumped over 14% in the last 12 days (from $92.67 to $105.99) since Egypt erupted - and no, it's not 'growth' hopes as last night's collapse in China did nothing to dent the surging social-unrest-premium. It seems, as much as Egypt, that the total collapse in the Brent-WTI spread is becoming self-feeding now - back below $2.50, its lowest in over 31 months. So between infrastructure issues in the US, technicals in the market, and Middle-Eastern unrest-premia, we are looking at the possibility of $4.10 gas in the not-too-distant future if this is anything but instantly transitory.

Big Banks Move Into Uranium Mining, Petroleum Products, Aluminum, Ownership and Operation Of Airports, Toll Roads, and Ports, and Electricity

Surging shale oil production has exposed the lag in the U.S. infrastructure to transport the new domestic energy source in a safe and the most cost-efficient timely manner to the end users. 

• ICE's NYSE to determine the rate used by key competitor CME: NYSE Euronext to Take Over Libor (WSJ)
• Japan slams China over maritime disputes (FT)
• The Twinkie Returns, With Less Baggage (WSJ)
• Pentagon Workers From Pennsylvania to Ghana Hit by Cuts (BBG)
• Why Prostitutes Aren't Enough to Deprive the World of Eliot Spitzer (BBG)
• Groups gather in Turkish protest park after night of clashes (Reuters)
• Apartment Rents Rise, But the Pace Is Slowing (WSJ)
• Asiana Seen Saving Millions With Tactic to Bar U.S. Suits (BBG)
• Bin Laden's life on the run revealed by Pakistani inquiry (Reuters)
• Fracking Firms Face New Crop of Competitors (WSJ)

Brief discussion of the price action that is lifting the dollar at expense of nearly every other currency.  

The situation in Egypt has not been tenable since the Muslim Brotherhood and President Mohamed Morsi took over, post-revolution, but now that the military has stepped in, ousted Morsi and placed him in detention, foreign investors are celebrating. No one knows what’s going to happen next, but the general consensus—at least for investors—is that things couldn’t get any worse, only better. (Unless you’re Qatari, but more about that later.)

After a few hours of calm yesterday, crude oil prices are once again surging back over $102 as the commander of the Third Field Army stated that troops deployed in Suez and South Sinai saw their "state of readiness" raised to "Maximum Alert." The announcement came after Cairo's airspace was closed for 40 minutes and flights were diverted to other airports because of air force drills. The 'state of emergency' has sent stocks sliding and put a modest bid into precious metals amid a call by Islamist allies of ousted Egyptian Prwsident Morsi to "take to the streets" and express their outrage.

The volatility of recent weeks is but a mere small taste of the volatility in store for all markets in the coming months and years. The global debt crisis is likely to continue for the rest of the decade as politicians and central bankers have merely delayed the day of reckoning. They have ensured that when the day of reckoning comes it will be even more painful and costly then it would have been previously.

North American crude oil has been in the news on several fronts this week, including some rapid price moves and an unexpected intervention by President Obama. Despite the publication of a new report projecting a much more rapid rate of tight oil supply growth than is generally expected and the entire Buffet-Railroad-Traffic-Pipeline meme relying on increasingly exponential dreams of the Bakken et al. saving us from our excess-energy-consuming selves, Barclays questions just how realistic these forecasts are, noting "it is perhaps wise to exercise a degree of caution over longer-term shale oil forecasts... partly because of the steepness of decline rates for shale oil wells, a lot of the very big productivity gains have already been made, and finally, skepticism around some of the more ambitious projections of US shale output due to the existence of numerous logistical barriers."

Following the drubbing in commodities in Q2 it is was only a matter of time that the pendulum swung the other way. At least that is the view of JPMorgan's commodities team led by Colin Fenton who says to "go overweight commodity indices now." JPM's summary: "It’s our first OW call on commodities since September 2010… we turned underweight commodities as an asset class in November 2011, shortly after it became apparent that Europe and Australia had entered manufacturing recessions and commodities were likely to underperform equities and bonds over the following 6 to 12 months, likely yielding negative returns in 1H12. Over the past year, we have grown more positive on the asset class, as energy has improved, expected  menaces in bulks and metals have arrived, and sentiment across commodities has belatedly soured. However, our strategies have sought to be directionally neutral. Now, we move to recommend a net long, overweight exposure for institutional investors for the first time in more than two years, based on ten fundamental factors we quantify in this note." Yes, that includes gold, although as a hedge JPM adds: "Liquidity could fall quickly in summertime. Buy 25-delta puts in oil, copper, and gold to protect a core position in commodity index total return swaps."