The Energy Report - Will they are Won't they?

While just the threat of European Central Bank buying may keep the Spanish and Italian bond vigilantes at bay, it is going to take more from the Fed to keep the market on an upward trajectory. The United States heads towards an election with an anemic jobs market as we merrily drive towards our fiscal cliff, it is imperative that Ben Bernanke and his crew not disappoint.

To buy bonds or not to buy bonds, that is the question. While the market gets out its special glasses to be wowed by QE3d, the moves the Fed might make may be a bit more subtle. Many believe that the Fed will only renew their commitment to keep rates lower for an eternity or at least until the Cubs win a World Series. Already our friends at the Fed have told us that we are going to see exceptionally low levels for the federal funds rate at least through late 2014 and now many believe that we might push that back through late 2015. In the thinly traded Fed Fund Futures we are seeing the odds of a rate cut getting pushed further in the curve. As of 5.27am central time, the only chance of a rate increase is all the way back in the July 2014 futures which is telling us right now that we would see an increase at the June 2014 meeting. Yet we are already seeing bids on the board that would take the increase out of contention. Then as you sift through the bids and offers, we could very easily with just a few trades, push that back to the February 2015 Fed Fund Futures which would be that Jan 2015 meeting.

The other possibility is that the Fed goes bond buying crazy and takes a clue from European Central bank leader Mario Draghi and announces an unlimited bond buying blitz. In the past when the Fed has announced QE, it has always reported exactly how much they would buy and when they would stop. Of course if the Fed comes out and says that, they may come in at any time and buy any amount of any type of bond and anytime in unlimited quantities, thus putting the fear of God into anyone who dares to believe that US yields could rise. At any time, at the whim of the Fed, they could flood the market with freshly printed dollar bills crushing yields and returns if the Fed so desires.

They could also double down on the Twist or as I call it, the Chubby Checker strategy. The Twist is the Fed manipulation of the yield curve where they sell bonds on the short end and buy on the long end in an effort to keep rate expectations low for the long term to encourage business and others to make long term investments that will grow the economy over the long run. The Fed has already announced that they will twist the yield curve to the tune of 267 billion by the end of the year in $45 billion dollar monthly installments. They may just decide to double that or even triple it in order to anchor low rate expectations in the mind of traders, come hell or high water and even fiscal cliffs or an election. Or they just may give up on the twist all together and go bond and mortgage back security crazy across the yield curve.

Speaking of the election, some feel that the Fed will wimp out and just give fiscal policy a short-term blitz, just enough to get us through November. 

For oil traders, what the Fed does is key. Oil has been unmoved lately with the disgusting and evil events in Libya and the demonstrations in Egypt, mainly because crude has been well supplied. Unlike the uprising in Libya on the way to overthrowing Gadhafi, North Sea production is at the highest level in five years, easing concerns for European refiners who relied on those high quality crude blends. OPEC is still pumping over 30 million barrels and US production is rising.

As far as products, we are seeing the heating oil versus gasoline, or RBOB spread as it is known by traders, is taking off.  Traders put on the hurricane hedge play by buying RBOB ahead of the storm and selling heat as a hedge. Now with refineries coming back on line and winter approaching, winter blends and the long heat short gas spread may continue to rock. Bloomberg News reported gasoline slid the most in three weeks as Philadelphia Energy Solutions started a fluid catalytic cracker. Gulf Coast refineries were returning after Hurricane Isaac and demand for the motor fuel declined last week. Futures sank 1.4 percent after startup of the unit, shut since Sept. 4 because of mechanical issues. The Energy Department reported that gasoline demand dropped 5.3 percent. Nine Louisiana Gulf Coast refineries were starting or operating at reduced rates as of Sept. 10 following Hurricane Isaac, which idled 13 percent of the region's capacity.

"With refineries and cat crackers coming back online, people are getting out of the long-gasoline, short-heating oil spreads," said Phil Flynn, Senior Market Analyst at Price Futures Group in Chicago. October-delivery reformulated gasoline, or RBOB, fell 4.19 cents to settle at $3.0016 a gallon on the New York Mercantile Exchange. Prices have risen 18 percent since sinking to a year- to-date low of $2.5501 on June 21. The Philadelphia refinery, a joint venture of Carlyle Group LP and Sunoco Inc. that can process 330,000 barrels a day of crude oil, is the largest plant near New York Harbor, the delivery point for Nymex futures. Gasoline demand fell last week to 8.7 million barrels a day, the lowest level in seven weeks.

Regular gasoline at the pump, averaged nationwide, increased 1.5 cents to $3.858 a gallon yesterday, AAA data showed. That's the highest level since April 22. The year-to- date high is $3.936, reached on April 4. Heating oil for October delivery rose 2.95 cents, or 0.9 percent, to $3.2152 a gallon on the exchange, the highest settlement since April 3. Prices have climbed 27 percent since falling to a year-to-date low of $2.5253 on June 21. Inventories of distillates, which include heating oil and diesel, increased 1.48 million barrels to 128.6 million. Supplies are the lowest for this time of year since 2004.

The only way to get the Fed Announcement is on the Fox Business Network and it's the only place to get The Power to Prosper and me every day!  Also make sure you open your account with the Price Group today and get a trial to my Daily Trade Levels! Just call me - Phil Flynn - at 888.264.5665 or email me at pflynn@pricegroup.com

Phil Flynn