Quantitative Leap:

We all know what happened to the price of oil after the Fed Embarked on its policy of quantitative easing. Well lets jus say it took a quantitative leap. And ever since that fateful day oil did not really see the $44 a barrel handle. Well at least until yesterday. The May crude oil contract gave back its quantitative leap in a big time sell off as the rest of the economic world seemed to run for safety. Bank of America’s less then stellar earnings and rumors about the health of the nation’s banks had created a flight to the more traditional safe havens. We also found out that the Banks just are not lending money. We saw the precious metals soar and a rush back into the dollar and the US treasuries and away from the industrials and away from oil. Seeing that oil has not traded in the $44 handle since the Feds decision the question is whether or not giving backs the quantitative leap in oil is a sign that the market is getting ready to focus on excess supply and be ;less driven by these other more esoteric whims of the large macroeconomic picture.

 Well, don’t you bet on it. Yes the oil did give back its quantitative leap yet one has to remember that the May contract is entering its last day. If one were to assume that oil was going into a downtrend just based upon the current massive over supply they would be missing the larger deeper message that the market has been trying to send it for some time. The oil market does not have its own identity. It is just a piece in the puzzle in this great economic crisis epic. Still a very important part/ Oil and its price may be the Feds best defense against the scourge of deflation. The Fed knows that a spike up in oil price can be felt against the economic spectrum and shock most procrastinating  prospective buyers out of a sense of complacency. If the stocks get hit too hard and the oil falls it will be in the Feds best interest to stir up a bit of inflation and the easiest way to do that is in oil. Maybe the Fed is secretly cheering on OPEC and their attempts to keep prices high. A drop in the price of oil was the main reason we saw consumer prices fall year over year for the first time since 1955. Oh sure you can say it is just oil but still it was the first drop in over a century.

Which brings up another point, when oil rallies with their stock market is it because the market believes that a rising stock market means that demand for oil will improve eating away at excess supply. Or does it mean that if the stock market rises it will be accompanied with inflation. Is the Contango in oil betting on better demand or just inflation? Well to be honest it is probably both.

 The market is telling you that the economy is going to recover but it will not be without some cost. That cost is inflation. In fact we may see years of inflation before things start to level out. Of course for the Fed that is a worry for another day and for them I think a nice problem to have. They seem to like inflation as opposed to the alternative.

The other reason that oil was weak was the expectation of rising supply. Bloomberg News says that U.S. oil supplies probably climbed last week as refinery utilization rates lagged behind those of previous years The Bloomberg survey says that crude-oil stockpiles rose 2 million barrels in the week ended April 17 from 366.7 million the previous week. Last week’s report showed that supplies were highest since September 1990. All of those surveyed said supplies gained.  Refineries probably operated at 80.9 percent of capacity, up 0.5 percentage point from the week before. Refineries operated at 85.6 percent of capacity in the week ended April 18, 2008.  Gasoline stockpiles probably dropped 600,000 barrels from 216.5 million the prior week.   Supplies of distillate fuel, a category that includes heating oil and diesel, probably fell 1 million barrels 139.6 million. Tonight we see the version from The American Petroleum institute. Last week The API reported that crude stocks increased by a whopping 6.5 million barrels. We will see if they can duplicate that. Feel free to call if you have any questions! My phone number is 800-935-6487or email me at pflynn@alaron.com Also check me out each day on the Fox Business Network.

Buy June crude oil at 4480 - stop 4330.

Buy June heating oil at 12500 - stop 11900.

Buy June RBOB at 12900 - stop 12700.

Short June natural gas apprx 390 (sold on Friday) - stop 420.