Leaks of Another Nature

What about the sanctity of market data? Well, I guess if Obama can tout the unemployment report before it is released, then I guess it's ok for the Chinese to leak data on their export and loan growth data. A report from Reuters reversed the Shanghai stock and set a more positive tone for global markets as they reported comments by a senior Chinese government official who boasted that Chinese exports were up by almost 50% above a year ago. At the same time this government official said that bank lending for the month totaled 630 billion yuan ($92.2 billion) in May which was down from April's 774 billion yuan in new loans. This caused the Shanghai Composite index, which was down on comments from Naoyuki Shinohara, the IMF deputy managing director who told a forum in Singapore: Adverse developments in Europe could disrupt global trade, with implications for Asia given the still important role of external demand to reverse and rise and may give oil traders on more reason to be optimistic about oil demand.

Another reason to be optimistic about oil demand may be last night's shockingly large and statistically amazing drawdown in crude oil as reported by the American Petroleum Institute. The API reported that crude supply fell by a much more than expected 4.5 million barrels! What is more the draw happened as crude imports increased by 728,000 barrels per day and crude runs fell by 112,000 barrels per day. So let me get this straight. We imported more crude, we used less and inventories fell by more than twice what was expected. Perhaps there is another leak in a storage tank somewhere.

While the drop in crude was bullish, a build in gasoline supply would be bearish. The API reported that gasoline supply actually increased by 1.5 million barrels. That might reflect in part a post holiday drop in demand that was reported by the MasterCard Spending Pulse report. The report on gasoline demand showed according to Bloomberg News that US. Gasoline demand at the pump fell by 5.8 percent last week as motorists drove fewer miles over the Memorial Day weekend.  MasterCard Inc. said that motorists bought an average 9.146 million barrels of motor fuel a day in the week ended June 4. That was a 5.8% drop and the lowest level of demand since February 12 and the biggest percentage drop since last July in the demand let down after the 4th of July. As for the rest of the API report the distillate number was a bit bearish and the reported 3 million barrel build was at the high end of expectations. The numbers of course will be subject to further review as the market prepares for the Energy Information Agency report on inventory today.

As far as the big picture on energy demand the Energy Information Agency made some big revisions to their outlook on energy prices in the eagerly awaited Short Term Energy Outlook.  The EIA dramatically lowered their crude oil spot price projection from last month projected average of $82 down to an average of $79 for the current year. They also lowered their next year's average estimate spot price down $3 a barrel to an average $83 a barrel. Why the big drop?  Well, all you have to do of course is to look at the futures price. The EIA says that, Crude oil prices fluctuated considerably last month, with the West Texas Intermediate (WTI) spot price ranging from a high of $86 per barrel on May 3 to a low of $65 on May 25, before ending the month at $74. The EIA says that, According to some market analysts, uncertainty over the global economic recovery, particularly with respect to Europe's debt crisis and the tightening of credit by China, and liquidation of futures contracts contributed to the crude price decline.

Well they got that right as I was one of those analysts. You see, even as the market was soaring in late April and into May, I was looking at the fundamentals with disbelief but there was no doubt I was feeling the heat. In late April and early May I was feeling the pain as I waited to have the uncertainty over the global economic recovery, particularly with respect to Europe's debt crisis and the tightening of credit by China lead to a liquidation of futures contracts and thank goodness it was about time. In fact the EIA last crude oil price projection was probably dead on arrival as the May outlook was released just as the EURO crisis was already unraveling and those that tried to downplay the crisis were sent running for the exits. In fact the day after the last EIA outlook was real I wrote, The global oil market is trying once again to find value in a global economy gone mad. The near trillion dollar effort to save the Euro from a debt laden collapse had the oil still trying to adjust to this latest chapter in the global economic crisis.  The failure to grasp the seriousness of the crisis in Europe had oil bulls living in a world of denial. At that point oil was already popping the amazingly naïve bullish bubble that the buyers of oil had created. The EU was not supposed to get into the toxic asset buying business and they were not supposed to have to bail out individual countries. This took away confidence from the Euro and that confidence was the best friend.

Holders of Euros flocked to gold and gold again hit a new record high. This time on a warning by Fitch's rating service to the UK to get their economic house in order.

We see this as a major shift in the value of oil. We still feel oil has a lot lower to go yet short term the bulls may find some support under $70. As for natural gas, reports that new offshore drilling regulations by the Obama administration eased some concerns over natural gas production. The longer the moratorium on drilling the more likely drillers will be to abandoning rigs.

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