Friday, July 6, 2012

A Shocking Bankers Coup in the Euro Crisis

By Ellen Brown

On Friday, June 29th, German Chancellor Angela Merkel acquiesced to changes to a permanent Eurozone bailout fund—“before the ink was dry,” as critics complained. Besides easing the conditions under which bailouts would be given, the concessions included an agreement that funds intended for indebted governments could be funneled directly to stressed banks.

According to Gavin Hewitt, Europe editor for BBC News, the concessions mean that:

[T]he eurozone’s bailout fund (backed by taxpayers’ money) will be taking a stake in failed banks.

Risk has been increased. German taxpayers have increased their liabilities. In future a bank crash will no longer fall on the shoulders of national treasuries but on the European Stability Mechanism (ESM), a fund to which Germany contributes the most.

In the short term, these measures will ease pressure in the markets. However there is currently only 500bn euros assigned to the ESM. That may get swallowed up quickly and the markets may demand more. It is still unclear just how deep the holes in the eurozone’s banks are.

The ESM is now a permanent bailout fund for private banks, a sort of permanent “welfare for the rich.” There is no ceiling set on the obligations to be underwritten by the taxpayers, no room to negotiate, and no recourse in court. Its daunting provisions were summarized in a December 2011 youtube video originally posted in German, titled “The shocking truth of the pending EU collapse!”:

The treaty establishes a new intergovernmental organization to which we are required to transfer unlimited assets within seven days if it so requests, an organization that can sue us but is immune from all forms of prosecution and whose managers enjoy the same immunity. There are no independent reviewers and no existing laws apply. Governments cannot take action against it. Europe’s national budgets [are] in the hands of one single unelected intergovernmental organization.

Here is the text of some of the ESM’s provisions


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Norway's Statoil is preparing to shut down production on the Norwegian Continental Shelf (NCS) following a notice of lockout from the Norwegian Oil Industry Association (OLF), the company said Thursday in a statement.

A lockout means a complete shutdown of Norwegian oil and gas production, highly possible government intervention and an end to the strike, which is now running into 12 days.

The decision made by the OLF affects all 6,515 members of Industry Energy, the Organisation of Energy Personnel (SAFE) and the Norwegian Organisation of Managers and Executives (Lederne) who are covered by the offshore pay agreements.

"The conflict is deadlocked and the demands are unreasonable," chief negotiator of the OLF Jan Hodneland said in a statement.

The announced lockout will start on July 9, 2012 at 2400 local time (2200 GMT), and all production on the NCS will be halted, Statoil said.

"Statoil is planning a controlled shutdown of production and return of personnel to land from July 9, 2012 at 2400 [local time]. It will take one to four days to shut all production on the NCS, depending on the characteristics and complexity of each field," Statoil added.

The shutdown on the NCS means that Statoil will have to grapple with a production shortfall of 1.2 million barrels of oil equivalent per day. The group's lost revenue resulting from the production stoppage will amount to around $87 million (NOK 520 million) per day, up an eye-popping $57 million (NOK 340 million) from the OLF's earlier estimate on June 27, 2012.

The striking workers are demanding for an early retirement age for offshore workers at 62 but the OLF has argued that their demands are not in line with government reforms.

"The strike could be a short-term factor supporting Brent prices, but not in the long-term as there are ample crude supplies," IHS Pruvin & Gertz managing director Victor Shum told Rigzone.

The NCS contains 70 oil and gas producing fields sited on the following blocks: The North Sea 56, The Norwegian Sea 13 and The Barents Sea 1. Among the affected fields is the Oseberg field which is critical in the oil market as crude produced from it forms part of the Brent Index. The index represents the average price of trading in the 21-day BFOE (Brent Blend, Forties, Oseberg, Ekofisk) market in the relevant delivery month as reported by industry media.

Posted courtesy of Rigzone.Com

Thursday, July 5, 2012

China's Top Refineries Cut July Output on Weak Demand

Top Chinese refineries will cut crude oil processing runs in July, following gains in the previous two months, as sluggish demand, poor refining margins and high fuel stocks hurt operations, a Reuters poll showed.

The 12 plants, which make up nearly a third of the capacity in China, the world's No.2 oil consumer, are located mostly in coastal areas, and plan to process 2.88 million barrels per day (bpd) of crude oil this month, the poll showed.

The daily rate, which accounts for about 84 percent of their refining capacity, is expected to be 2 percent, or roughly 60,000 bpd, lower than the actual 2.94 million bpd in June.

Oil demand in China posted in April its first yearly fall in at least three years and edged up only 0.8 percent in May as economic growth slowed.

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Wednesday, July 4, 2012

Market Giving Major Correction Signs

The SP 500 has rallied up into the 1375/77 pivot areas as I had outlined to my subscribers about 10 days ago on the weekend update as possible highs for C wave up from the 1267 SP 500 lows of June. Many forecasters are now getting very bullish, but I continue to see divergences with The Elliott Wave counts and other indicators that are giving me some short term concerns, and then we can determine if these are long term issues still for the markets.

Today’s Independence Day update shows a new chart pointing out prior “Recovery rally highs” since the May 2011 1370 highs on the SP 500. In each case, a major market correction unfolded when we had the NYMOT indicators at these levels along with Stochastics, CCI, and other Fibonacci indicators I incorporate at various times. Currently, we have the NYMOT indicators at a reading of 307. To understand this in context, its the highest reading in the past two years. Higher than the 1292 SP 500 rally high in October 2011 (From 1074) and higher than any other rally high in the past 24 months.

Adding to that, we have the Stochatics indicators at extreme short term highs and the CCI index is nearing the levels it read at the recent 1363 pivot highs. Finally, further puzzle pieces continue to show divergences in the Elliott Wave patterns. The rally from 1267-the current 1375 levels can’t be interpreted in my opinion as a 5 wave rally (which would be bullish), instead its an overlapping 3 wave rally in my views., or a double zig zag. These types of rallies are corrective rallies against a prevailing trend, which was down in to early June.

The rally to 1375 areas is actually in the zone I discussed a few weeks ago, and still in the 1386 or lower Fibonacci zone I’ve outlined as a C wave target for an ABC rally from 1267 June 2012 lows. My work still gives a model of 1422-1267 as 5 waves down, and 1267-current as a zig zag corrective pattern up. The market will soon tip it’s hand I think after this holiday week is over and we see a bit more volume return next week.

With all of this said, it is difficult to be too bearish given the 52 week highs in many blue chip stocks as well as the strong advance-decline lines and recovery in some of the tech stocks of late. When you get a lot of conflicting signals like this, I try to fall back on a variety of indicators and clues to help clear up the clouds of the market.

In conclusion, near term I will be very surprised if at a minimum we do not have significant pullback in the market next week. The rally could sneak a bit higher during this holiday light volume week, so lets look to next week for volumes to return and tell the tale. Taking some gains off the table in the coming 1-2 trading days is probably not a bad move.


By David A. Banister- Chief Strategist The Market Trend Forecast


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CME Group Energy Market Report Recap for July 4th

Is the SP 500 Closing in on a Top?

August crude oil prices traded sharply higher during the US session and climbed to their highest level since May 31st. There were a number of supportive features supporting the advance including, hopes that global central bankers might offer up more stimulus to bolster growth, mounting tensions in Iran and reduced North Sea output. Reports earlier that Iran had successfully test fired mid range missiles was seen contributing to the fear premium in the crude oil market, by raising the threat of supply disruptions.

This comes along with talk that lawmakers were working toward a bill to block oil tanker traffic through the Straits of Hormuz. The oil workers strike in Norway continues and has reduced North Sea production by around 250,000 barrels per day. Further support for the crude oil market might have come on expectations that this week's EIA crude stocks report will show a draw in the range of 2.25 to 2.5 million barrels, which is a bit larger than the five year average draw for this week of the year of 1.1 million barrels.

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Tuesday, July 3, 2012

Is the SP 500 Closing in on a Top?

Friday’s strong move to the upside caught a lot of traders on the wrong side of the market. Regardless of whether financial pundits refer to it as a short squeeze or simply panic level buying is largely irrelevant. Time and price are always the final arbiters of financial markets. Price on Friday was clearly telling us that too many market participants were shorting equities and the Euro.

The news coming out of the European Summit is what drove prices higher according to most media outlets. However, few traders have actually taken the time to research the fact that Germany has not technically agreed to the European Stability Mechanism legislation at this point.

The German Constitutional Court has delayed the passage of the ESM legislation on the grounds that this court needs to affirm the agreement is constitutional. Several high profile politicians in Germany have allegedly filed multiple law suits surrounding the new ESM law.

Should the German Constitutional Court determine the ESM legislation is unconstitutional a referendum will go before the German people. The last thing the Eurocratic blue bloods and their banking cartel minions want is regular people actually having a say in the outcome of the Eurozone project.

Ultimately the German people do not appear to be in favor of propping up the rest of Europe in exchange for more empty promises of austerity. Furthermore, the German people recognize that they are taking on a massive risk by loaning money to insolvent banks and other Eurozone sovereigns who have not proven to be prudent with managing their current fiscal conditions.

The decision made by the German high court could have a far-reaching impact on the price action in European financial markets as well as in U.S. domestic financial markets. The outcome of the forthcoming decision will carry far more weight than Friday’s June unemployment report. Already I am reading that should the unemployment number come in significantly weaker than expected Ben Bernanke may work to convert Operation Twist into full blown QE III at the next FOMC Meeting.

The addiction to cheap money by large institutional banks will not end until the Fed is no longer able or willing to continue to print money. Should economic data continue to weaken going into earnings season I am sure the banter regarding QE III will increase at lightning pace and bad news for the economy will be good news for stocks. Poor economic data will increase the likelihood for additional liquidity being provided through a 3rd Quantitative Easing initiative.

Leaving the macroeconomic data aside and focusing on market technicals, we find several unsettling situations in a variety of underlying assets and indicators. The warnings are largely falling on deaf ears as the equity bull parade continues. Before we talk about the S&P 500 Index directly, perhaps we should examine some of the indicators and underlying assets that are sending out bearish smoke signals.

The first chart I would draw your attention to is the McClellan Oscillator which is a widely followed and focuses on market breadth as a possible market indicator for tops and bottoms. Note the key high and low points of the Oscillator and how they correspond with the S&P 500 Index.

Read the entire article and see the charts for "Is the SP 500 Closing in on a Top?"

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New Pipeline Project Could Lower Natural Gas Transportation Costs to New York City

Future natural gas transportation costs to New York City could be reduced with the expansion of the existing Texas Eastern Transmission pipeline from Linden, New Jersey to Manhattan, New York (see map above). On May 22, 2012, the Federal Energy Regulatory Commission (FERC), the main jurisdictional authority over the construction of interstate natural gas pipelines in the United States, approved an 800,000 million British thermal unit (MMBtu) per day, or 800,000 dekatherms per day, expansion of the pipeline.

This project is slated to begin service in November 2013 and represents one of the biggest transportation service expansions in the Northeast during the past two decades. The project could have the following effects on the New York City market: reduce reliance on oil fired generators, enhance the reliability of natural gas supplies, and lower transportation costs especially in the winter. Spectra Energy secured firm transportation agreements for this expansion with these customers: Consolidated Edison (170,000 MMBtu per day); Chesapeake Energy Marketing, Inc. (425,250 MMBtu per day); and Statoil Natural Gas LLC (204,750 MMBtu per day).

map of Proposed New Jersey - New York natural gas pipeline expansion, as described in the article text
         

Read the entire post at EIA.com

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Gold still at risk of a large downward move before the rally

Gold has been busy consolidating in what I believe will be a 13 Fibonacci month Primary wave 4 correction. The Gold bull market I’ve been following since 2001 is a likely 13 year bull cycle that will end in 2013 or 2014 depending on how you count. This current correction pattern is working off a 34 Fibonacci month rally that took Gold from 681 to 1923 at its ultimate highs. Last fall I warned about the parabolic run likely ending in the 1908 ranges and for investors to position themselves accordingly.

Today we have Gold trading around 1600 and our recent forecast in May was for a rally into Mid June topping around 1620-1650 ranges in US Dollars. The intermediate forecast still calls for a possible drop to 1445-1455 ranges this summer, the same figures I gave out on TheStreet.Com interview last September for a Primary wave 4 low.....Read the entire article and charts.


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CME: Morning Crude Oil Market Report for Tuesday July 3rd

August crude oil prices traded sharply higher during the initial morning hours, supported by hopes for more global central bank intervention to stimulate growth and better than expected Chinese service sector data overnight. Other crude specific fundamentals supporting the morning gain come from the ongoing oil workers strike in Norway that has reduced North Sea output and a growing fear premium in the market in response to reports that Iranian lawmakers have drafted a bill to cut oil tanker traffic in the Straits of Hormuz. Expectations for this week's delayed EIA crude stocks report are for a draw in the range of 2.25 to 2.5 million barrels.

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Exxon May Soar On New Potential In Mexico

Things have been looking great for Exxon Mobil (XOM) lately. Anadarko Petroleum (APC) recently indicated that Exxon may become a partner in Anadarko's Gulf of Mexico operations. Anadarko is already partnered with Plains Exploration & Production Company (PXP) on its deepwater Phobos project in the Gulf, and according to Anadarko Vice President of Investor Relations and Communications, John Colglazier, Exxon may enter the project with up to a 20% working interest, which would reduce Anadarko's interest from 50 to 30%.

In exchange, Anadarko could receive cash and a drilling carry, which would potentially cover the cost of the project's first exploration well. This would be beneficial for Exxon Mobil, and represents just one of the recent successes the company has seen lately. Below, I will show how Exxon's current position within the energy sector makes it a strong investment now.....Looking Deep for Gains

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Iran Drafts Bill to Block Strait of Hormuz

Iran's National Security and Foreign Policy Committee has drafted a bill calling for Iran to try to stop oil tankers from shipping crude through the Strait of Hormuz to countries that support sanctions against it, a committee member said on Monday.


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Looks like we are in good company SDRL

Looks like we are in good company. Most of you know we SeaDrill, ticker SDRL, is one of our COT fund favorites.....

Vanguard Windsor II fund manager Jim Barrow is "nervous" about oil and energy stocks, but is bullish on Seadrill as "the dominant factor" in high tech drill ships. SDRL has the world's newest fleet, Barrow exults: "Their boats rent for more than other people’s do. It is a great company run by Norwegians who know exactly what they are doing."

Adams video update "As we start Q3 is a global slowdown in the cards"

A surprise announcement out of the European summit pushed the market higher on Friday. It was also the end of the week, the end of the month, and the end of the quarter. For Q2 most of the markets were down, including the equity markets. We think that’s an important element to look at. We still believe the trend is down and intact and that Friday was more of a short covering rally.

Now, let’s analyze the major markets and stocks on the move using MarketClub’s Trade Triangle Technology.....Click Here to view today’s video

Monday, July 2, 2012

CME: Natural Gas Prices Holding at Upper End of Trading Range

Natural Gas prices are continuing to trade around the upper end of the trading range on lighter than normal volume (likely related to the holiday this week in the US) as the very hot weather across major portions of the US results in a larger than normal call on Nat Gas for power related cooling demand versus the possible loss of Nat Gas demand as the economics of coal to gas switching continues to fade at current price levels. The economics of coal to gas switching are hovering around the unchanged level between coal and Nat Gas and at a level where utilities could begin to move back to coal in light of the overstocked coal inventory situation at many utility facilities.....Read the entire article.

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CME: Crude Oil Prices Remain Firm

Crude oil and most risk asset markets drifted a tad lower after last Friday's meteoritic short covering rally on the back of the EU Ministers deal. The deal details are still not available and there are some indications from Finland (according to a report in Reuters) that the deal could be fraying. I am not sure that will be the case so early after the deal had been put together but these kind of rumors and comments are likely to emerge over the next several weeks as the technocrats begin the process of working out the details of the deal. As such the markets will be reacting accordingly to any indications that the deal is changing especially after the large rally on Friday.....Read the entire article.

Dennis Gartman: Sell into Strength, Crude Oil Rally Won’t Last

Energy bulls prepare for disappointment. Commodities pro Dennis Gartman doesn’t think any rally in oil will be sustainable.

“I don’t see how an advance can be sustainable,” says Gartman. “The amount of oil [CLCV1  84.46  0.71  (+0.85%)] coming onto the market - is overwhelming.”

First and foremost Gartman believes Saudi Arabia intends to keep the world well supplied because they want to keep prices low and squeeze Iran, which is more susceptible to lower oil. (Saudi Arabia and Iran are longtime rivals with Tehran openly challenging the legitimacy of the royal House of Saud.)

LIGHT CRUDE AUG2
(CLCV1)
84.46     0.71  (+0.85%%)
New York Mercantile Exchange
But that's not the only negative catalyst for oil.
In addition, Gartman believes the market will be well supplied due to discoveries made right here in the US such as the massive discovery in North Dakota’s Bakken Shale.

And Gartman thinks the abundance of nat gas in the US is negative for oil because trucking companies have a strong incentive to convert their fleet to alternative energy.

All told, “I can see the rally in oil lasting another $2-$3 dollars but any bounce should be sold,” he says. “At the end of the day, I’d be a seller."

Investor Dennis Gartman tells "Fast Money" which way he thinks crude oil will be going in the second half of this year.


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Crude Oil Bulls Struggle to Hold 20 Day Moving Average

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Crude oil fell on Monday as the Institute for Supply Management’s U.S. factory index dropped 1.4 percent and collective Euro unemployment hit historic highs never seen in history.

Crude oil posted an inside day with a lower close on Monday as it consolidated some of last Friday's rally but remains above the 20 day moving average crossing at 82.49. The mid range close sets the stage for a steady opening when Tuesday's night session begins. Stochastics and the RSI are turning bullish signaling that sideways to higher prices are possible near term. If August extends last Friday's rally, the 38% retracement level of this year's decline crossing at 90.43 is the next upside target. If August renews this year's decline, the 75% retracement level of the 2011-2012 rally crossing at 73.28 is the next downside target. First resistance is the reaction high crossing at 87.32. Second resistance is the 38% retracement level of this year's decline crossing at 90.43. First support is last Thursday's low crossing at 77.28. Second support is the 75% retracement level of the 2011-2012 rally crossing at 73.28.

John Kilduff, trader with Again Capital, said a weak jobs report this Friday could spur additional selling. But he doesn't see much chance of oil slipping into the $60s, as some had been discussing prior to Friday. "It's only a draft," said Tony Rosado, an oil options analyst and broker at GA Global Markets. But if Iran takes more concrete action in the strait, an important waterway for oil, "then I think people will have to take it more seriously," Mr. Rosado added.

Natural gas closed higher on Monday and is poised to extend the rally off June's low. The high range close sets the stage for a steady to higher opening on Tuesday. Stochastics and the RSI have turned bearish hinting that a short term top might be in or is near. Multiple closes below the 20 day moving average crossing at 2.564 are needed to confirm that a short term top
has been posted. If July extends the rally off June's low, February's high crossing at 3.137 is the next upside target. First resistance is last Wednesday's high crossing at 2.975. Second resistance is February's high crossing at 3.137. First support is the 10 day moving average crossing at 2.714. Second support is the 20 day moving average crossing at 2.564.

Gold posted an inside day with a lower close on Monday. The high range close sets the stage for a steady to higher opening when Tuesday's night session begins trading. Stochastics and the RSI are turning bullish signaling that sideways to higher prices are possible near term. Multiple closes above the 20 day moving average crossing at 1600.10 are needed to temper the bearish outlook. If August renews the decline off June's high, May's low crossing at 1529.30 is the next downside target. First resistance is the 20 day moving average crossing at 1600.10. Second resistance is reaction high crossing at 1642.40. First support is the reaction low crossing at 1556.40. Second support is May's low crossing at 1529.30.

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Oil Traders Keeping an Eye on Iran

Are you ready for this weeks move?

CNBC's Sharon Epperson on oil price action in the day ahead, with an outlook on EU sanctions against Iran and tomorrow's meeting with Western countries about its nuclear program.



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Obviously, the Crude Oil Markets Overreacted Last Week

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CME: August crude oil prices traded lower during the overnight and early morning hours, as they corrected Friday's more than 9.0% gain. Some traders suggested that sluggish China and European manufacturing data served to tamp down global oil demand prospects and pressured crude oil prices lower. Meanwhile, there were a couple of positives in the crude oil market that might have limited early morning losses, including a European embargo on Iranian oil that went into effect over the weekend and the ongoing oil workers strike in Norway. The Commitments of Traders Futures and Options report as of June 26th showed non-commercial traders were net long 178,866 contracts, a decrease of 13,193. Non-commercial and nonreportable traders combined held a net long position of 192,382 contracts, for a decrease of 5,729 in their net long position.

COT: August crude oil was lower overnight as it consolidated some of last Friday's rally but remains above the 20 day moving average crossing at 82.49. Stochastics and the RSI have turned bullish signaling that sideways to higher prices are possible near term. If August extends the rally off June's low, the reaction high crossing at 87.32 is the next upside target. If August renews this year's decline, the 75% retracement level of the 2009-2011 rally crossing at 73.28 is the next downside target. First resistance is the reaction high crossing at 87.32. Second resistance is the reaction high crossing at 92.52. First support is last Thursday's low crossing at 77.28. Second support is the 75% retracement level of the 2009-2011 rally crossing at 73.28.

“The economic data doesn’t seem to suggest oil demand is going to be very explosive, and the demand expectation is softening,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “The market realized that maybe people overreacted last week and we are pulling back to a more normal area.”

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Sunday, July 1, 2012

EconMatters: Crude Oil....A Perfect Bear Storm Despite the Euro Pop

Crude oil prices, along with world stocks, surged on Friday after euro zone leaders reached an accord on directly recapitalizing regional banks as well as measures to cut soaring borrowing costs in Italy and Spain. Brent crude jumped more than 7% in one day to close at $97.80 a barrel, while WTI also settled up 9.36% to $84.96 a barrel on NYMEX. However, for the quarter, spot Brent and U.S. oil futures still fell 20.4% and 17.5% respectively, their steepest quarterly percentage drops since the fourth quarter of 2008 post financial crisis. Looking ahead, we believe this little 'Euro pop' will soon fizz out weighted down by the reality of basic market fundamental factor.

First of all, the Euro accord bandaid does not fundamentally change what's causing the current crisis to begin with, high sovereign debt, out of control government spending, and insolvent regional banks. Add to this scenario is a slowing of European demand, parts of Europe are in a recession, and this not only affects less oil being consumed in Europe, but backs all the way up the supply chain from Ford automobiles being sold and needing to be manufactured, to Chinese factories needing to ratchet manufacturing cycles down to account for less demand out of Europe.


Macroeconomics aside, the oil inventory picture in the U.S. is also quite interesting these days, to say the least. For example, On 1/27/2012 there was 338,942 Million Barrels in US storage facilities, then on 2/24/2012 it started slowly rising to 344,868 Million, then Inventory builds started accelerating as on 3/23/2012 there were 353,390 Million on hand, then we jumped dramatically to 375,864 Million Barrels on 4/27/2012, with another sizable increase to 384,740 on 5/25/2012, and on 6/22/2012 the number stands at 387,166 Million Barrels in US Storage facilities, way above the five-year range. (See Chart Below)


Chart Source: EIA, June 27, 2012

This is taking place despite the domestic refinery run rate has increased from 85% in January to 92% in the week ending June 22 (See Chart Below). As of June 1, 2012, crude oil inventories held at Cushing, OK were 47.8 million barrels, the highest level on record, according to the U.S. Energy Dept. These are historically high numbers, but the magnitude of the rise over what is generally the stronger part of the US business cycle each year is the more compelling story.


Chart Data Source: EIA, as of June 22, 2012

With record refinery runs, we still cannot make a dent in the oil Inventories, which implies that there is a lot of oil in the market. In fact, if this trend continues, even just for the next three months, we are going to shatter previous storage records here in the US. At current rate, the inventory number could smash through the 400 Million Barrel level over the next quarter.


This does not bode well for the oil market when the slow part of the year comes around in August and September, where Gasoline demand drops off rather sharply, and is usually the slowest part of the year in terms of fuel usage, demand, and prices typically drop significantly each year. Technically, WTI could easily blow below $70/b with no major support till $60/b comes this August/September, and prices would remain challenged in the short to medium term.


What are the reasons for this glut of oil in the US? There are several, China has slowed manufacturing and exports, i.e., their economy has pulled back considerably. India is having all sorts of credit worthiness concerns, and is also growing at a slower rate. So in short, the emerging market economies are using less oil.


The demand picture in the U.S. is also quite dismal. EIA data show in the first quarter, total U.S. liquid fuels consumption fell 3.7% YoY due to high prices and record warm weather. For the second half of 2012, and 2013, EIA expects a YoY increase of only 1.2% and 0.6% respectively in liquid fuels consumption.


Furthermore, there are more domestic oil production mostly from unconventional shale plays, as there are more Capex drilling projects started during the beginning half of the year on high oil price. This has also pulled a lot more independents into drilling, and we are producing more oil each day than we actually consume or need. This has been one major contributing factor in these continuous inventory builds during the strong part of the usage cycle, as refineries are operating at record utilization levels since the recovery with the seasonal spring/summer driving season going from March with Spring Break through basically labor day, (some say July 4th is the peak of the Summer driving season).

Internationally, the Libyan oil is back on line, and other oil producing countries pumping more oil out of the ground compared to the last 5 years during this era of elevated oil prices. The Saudis are producing at the high end of their range as well. In a recent report, U.S. EIA noted that global company held oil inventories in the major industrialized nations will be sufficient to cover 57.7 days of demand at the end of 2012, the highest level in 15 years.

Basic economics plays a role in this story as well. Just ask this one question--Where are the high margin business opportunities over the last 5 years? It sure isn`t in the Banking Industry with deal-making and large scale private equity deals falling off a cliff. It hasn`t been in the real estate market either.

Market dynamics 101 stipulates that high oil prices leads to higher margins, which leads to more investment resources being directed to this sector which ultimately rebalances the market, and oil prices come back down. This is why there is often a boom and bust cycle that plays out in many investment sectors, and historically the energy and oil sectors have been the poster kids to this rule.

So essentially, five years of really high prices--higher than the actual fundamentals of the economy should dictate--have caused an artificial market scenario where longer-term demand was being stifled by currency concerns, inflation concerns, while commodity investment in general has served as a case of over investment in this area in relation to true, actual Global demand.

Throw in the fact that it seems everybody (governments as well as consumers) is in debt, nobody has any money, credit issues are becoming increasingly burdensome to deficit financing to artificially stimulate growth via the government intervention route, all these factors are forming a perfect storm for the oil market to face some major headwinds for the next 5 years.


Posted courtesy of our friends at EconMatters.Com


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