That Ol' Supply Side Glut Rut.
In a day of economic mixed signals and shifting emotions, at the end of the day oil got weighed down by the old supply side glut. Oil probed the lower end of the trading range, which excluding the Dubai drop aberration, is in the$75 handle. Ok I know that to a market purest there is no such thing as an aberration and oil has already broken down and will resume the trend downward. While I agree they are right the truth is I think that the Dubai drop was a glimpse of our future but the market is not ready to accept that reality yet. Oil is still finding support from the weak dollar and the perception of continued super accommodative policies. At Ben Bernanke's confirmation hearing there was nothing that he said that would make the market feel otherwise. And with the weekly jobs figures giving us hope that the worst is over only to have the ISM non manufacturing number take the winds out of our sails, the key for oil will be today with big monthly jobs number that will tell us where we are in the stage of the economic recovery and the state of the economy and its impact on the dollar.
In the beginning of this economic crisis I tried to explain that the move up in oil was an event that was not being driven by the fundamentals of supply and demand but the fundamental truth that the oil market had become a safe haven investment against bank failures and shifting values of foreign currencies and many thought I had fallen off my rocker. Well to fall off my rocker one would have to assume I was on my rocker to begin with. In fact one financial writer said that the movement in dollar/oil relationship was just a coincidence the same way it was a coincidence that the winner of a football champion or rugby champion could predict a bull market. Nancy Agin at Rig Zone pointed out that the Wall Street Journal says that oil's correlation to dollar movements has jumped from 20%-30% in May to nearly 70% right now. As with many other asset classes in this period of lax monetary policy, prices appear less subject to fundamentals, and more to cosmic forces.
Cosmic forces? Those cosmic forces as they call them are just as important and perhaps more important than just the hard core numbers of supply and demand. If a commodity's value is expressed in a currency it means that the relative value and confidence in that currency is a major factor in determining the commodity value. Throughout this financial crisis the dollar value has shifted dramatically as has the confidence in the economy and the stability of the global economic system. This has changed the relative value of crude. The correlation to the dollar is now more pronounced because many of the market players are pretty much in agreement with supply and demand figures and admit it's secondary nature to global economic policies. In other words, we know that we would have practically no demand unless the global central banks saved the global economic system from collapse. We know there is ample supply of crude globally. We know demand is starting to improve but we also know that it will take many years and maybe even decades before we get back to pre-crisis demand levels. Peak oil in the near term looks about as credible as the science of global warming! Now add to that a glut of natural gas due to weak demand and major new discoveries and it could be even longer. The market is in agreement to the fact that supplies of oil are ample for years and the key to price is the economic recovery and how that is expressed in terms of dollars and common sense.
Earlier this week Iran's oil minister warned world powers that Iran may stop exporting crude oil if economic sanctions continue to be enforced on the Islamic republic. Every oil producer in the world says. yes, thanks, please do! Dow Jones reported that Iran's Masoud Mirkazemi warned that, Iran is one of the world's major oil producers and any cut in Iran's supply of crude will, undoubtedly, cause prices to surge. Or not! Every oil producer in the world would love to step in and fill part of that Iranian void. Sorry Mr. Mirkazemi, in a world filled with a glut of oil your threats to try to hurt the world economy don't carry the same weight as they might have a few years ago.
I want to take some time to again thank the many readers of The Energy Report! Your comments and support are just awesome. It is great to hear from readers from every continent on the globe, we are getting more readers everyday and I thank all of you for all the emails and phone calls.
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We're long January crude oil from apprx 7590 - stop 7470.
We're long January RBOB from apprx 19750 - stop 19400.
Sell January heating oil at 20800 - stop 21200.
Buy January natural gas at 412 - stop 390.