While Washington seems to get further away from a debt ceiling resolution the markets are pricing in additional risk and both sides are blaming each other. Senator Harry Reid is blaming the tea party and says that Speaker Boehner's plan is not a compromise and Harry is so upset he keeps repeating himself by saying "Democrats will not vote for it, Democrats will not vote for it." I thought his needle was stuck and someone would have to nudge him to get him to stop repeating himself. Yet not only will Democrats not vote for speaker Boehner's plan, Tea party Republicans may balk at it as well. The USA Today reported that a, " review released Tuesday afternoon by the Congressional Budget Office said the bill would only reduce the deficit by $850billion over 10 years, or $1.1 trillion assuming that current spending on the wars in Iraq and Afghanistan continues. Boehner had said the plan would cut $1.2trillion in spending over 10 years and raise the debt ceiling by $1trillion. It would also create a commission to identify more spending cuts to be made once the debt ceiling needs to be raised against in six months."
While oil flipped flopped on light volume it is clear that the safe havens seem to be commodities. Not only is gold and the Swiss franc hitting record highs we are seeing a surge back into the Australian and Canadian dollar or the commodity currencies. (A move you may have caught if you were getting my daily trade levels) Currencies that have rallied basically since Fed Chairman Ben Bernanke put quantitative easing back on the table but even more so as the markets realize that a US default or downgrade will be bullish for commodities. There will be exceptions and volatility. Oil might fall at first as it tries to assess the potential for demand destruction. Yet as judged by the moves in the Canadian and Australian dollars we know where money will flow. In the long run a debt default in the US would be eventually bullish for oil, very bullish. Now I'm repeating myself!
Yet as I have said before a default or a United States debt downgrade would almost guarantee a third round of quantitative easing or as I like to call it QE 3D. The printing of more money after a default would add a very bullish dimension to the commodity markets. The Fed acting to calm the markets would flood the markets with freshly printed liquidity. That would counter rising interest rates with currency devaluation. You would see funds throw hot money at the emerging markets and demand for oil would surge in places like China, despite the sharply rising price in dollar terms.
Besides as I also said before, we already kind of had a dry run for this crisis if you look back to the beginning of the global financial crisis. Back then the world thought that this "little" subprime crisis was only a US problem. That the rest of the world had "decoupled" from the US and while their banks might fail the rest of the world was sufficiently protected from any US fallout. In fact Jean Claude Trichet was so convinced that this crisis was a US problem he raised rate in Europe while the US was lowering them. This caused a mad rush out of US holdings and caused a massive sell off in the dollar and a surge into commodities setting the stage for a run in oil to an all-time record high. We saw what commodities do as Fed action and an aversion to the dollar so you can be prepared if indeed the "unthinkable happens". A downgrade to the US debt rating would have less of an impact then a default but would cause havoc nonetheless.
Yet some of the bullish shorter momentum in oil may be slowed due to a larger than expected increase in crude supply according to the American Petroleum Institute. The API reported a huge rebound in crude oil supply to the tune of 4 million barrels. Gas stocks also surprisingly fell by 639,000 barrels. And we saw another big build in distillate stocks increasing by a hefty 2.9 million barrels. The main reason for the build was a big rebound in crude imports that hit 452,000 barrel per day. Refinery runs also slowed causing increase of 317.000 barrels in the Cushing, Oklahoma delivery point. This could be a sign that we hit the refining peak and we will see demand and runs start to fall off.
Brazil is getting desperate to slow gasoline demand as the booming Brazilian economy is putting stress on Brazilian refining capacity. Brazil's consumer confidence hit an all time high and they are guzzling gas and ethanol like it is going out of style. Petrobras, the state run oil company, is warning that prices will have to rise.
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