Platts: ICE Brent futures lose previous quarter's premium to NYMEX WTI, Dubai

After a strong performance at the beginning of the year, the forward Brent complex lost some of its strength to WTI and Dubai crude futures in the second quarter of 2013 on a combination of European demand woes and stronger East and West crudes.

The narrowing of the spread between the ICE Brent futures and NYMEX light sweet contract, known as Brent/WTI spread, was a notable change in the quarter.

Toward the end of June, the ICE Brent front-month futures contract narrowed its premium to front-month NYMEX crude to below $6/barrel, more than halving from the beginning of the quarter. (A trend which of course has continued, with the spread tumbling below $5/b and even $4/b in just the first three days of July.)


Here's a short video in which John Carter shows how he trades oil and how he identifies targets when to take profit.

Crude Oil Spikes as Euro Leaders Relax Spains Debt Conditions

Check out our latest Video, Market Analysis and Forecast for the Dollar, Crude Oil, Gold, Silver, and the SP500

CME: August crude oil prices traded sharply higher during the early morning hours, helped by an EU agreement aimed at relaxing borrowing costs in Spain and Italy. Risk assets across the globe appeared to embrace an agreement, and that has fostered ideas that global oil demand could turn higher. In addition to easing concerns over the European debt debacle, the crude oil market has also drafted support from tightening North Sea supply concerns.

COT: Crude oil was higher due to short covering overnight as it consolidates around the 62% retracement level of the 2009-2012 rally crossing at 80.33. Stochastics and the RSI are oversold and are turning neutral to bullish hinting that a short term low might be in or is near. Closes above the 20 day moving average crossing at 82.31 are needed to confirm that a short term low has been posted. If August extends 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 20 day moving average crossing at 82.31. Second resistance is the reaction high crossing at 87.32. First support is Thursday's low crossing at 77.28. Second support is the 75% retracement level of the 2009-2011 rally crossing at 73.28.

Bloomberg: Crude posted its steepest intraday gain in eight months, increasing as much as 4.5 percent and trimming the biggest quarterly decline since the final three months of 2008. Oil gained after euro area leaders agreed to relax conditions on emergency loans for Spanish banks and possible help for Italy. Prices may advance after the European Union’s ban on the purchase, transport, financing and insurance of Iranian crude starts on July 1, a Bloomberg survey showed. Norway’s first industrywide energy strike since 2004 is in its sixth day.

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Crude Oil Bears Supported by Lack of Confidence in European Debt Crisis and China Numbers

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Crude oil closed lower on Monday as it consolidates below the 62% retracement level of the 2011-2012 rally crossing at 80.33. The mid range close sets the stage for a steady opening when Tuesday's night session begins. Stochastics and the RSI are diverging but are neutral to bearish signaling that sideways to lower prices are possible near term. If August extends this spring's decline, the 75% retracement level of the 2011-2012 rally crossing at 73.28 is the next downside target. Closes above the 20 day moving average crossing at 83.91 are needed to confirm that a low has been posted. First resistance is the 20 day moving average crossing at 83.91. Second resistance is the reaction high crossing at 87.32. First support is last Friday's low crossing at 77.56. Second support is the 75% retracement level of the 2011-2012 rally crossing at 73.28.

Natural gas closed higher on Monday as it extended this month's rally. The low range close sets the stage for a steady to lower opening on Tuesday. Stochastics and the RSI are neutral to bullish signaling that sideways to higher prices are possible near term. If July extends this month's rally, May's high crossing at 2.838 is the next upside target. Multiple closes below the 20 day moving average crossing at 2.434 are needed to confirm that a short term top has been posted. First resistance is today's high crossing at 2.731. Second resistance is May's high crossing at 2.838. First support is the 20 day moving average crossing at 2.434. Second support is this month's low crossing at 2.168.

Gold closed higher due to short covering on Monday as it consolidates some of this month's decline. 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 bearish signaling that sideways to lower prices are possible near term. If August extends last week's decline, May's low crossing at 1529.30 is the next downside target. Closes above the 10 day moving average crossing at 1606.40 are needed to temper the bearish outlook. First resistance is the 10 day moving average crossing at 1606.40. 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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Exiting an Option Position

From guest blogger Todd Mitchell.......

Once you own options, there are three methods that can be used to make a profit or avoid loss: exercise them, offset them with other options, or let them expire worthless. By exercising what you have purchased, you are choosing to take delivery of (call) or to sell (put) the underlying asset at the option’s strike price. Only buyers have the choice to exercise an option. Sellers, on the other hand, may experience having an option assigned to a holder and subsequently exercised.

Offsetting is a method of reversing the original transaction to exit the trade. If you bought a call, you have to sell the call with the same strike price and expiration. If you sold a call, you have to buy a call with the same strike price and expiration. If you bought a put, you have to sell a put with the same strike price and expiration. If you sold a put you have to buy a put with the same strike price and expiration. If you do not offset your position, then you have not officially exited the trade.

If an option has not been offset or exercised by expiration, it expires worthless. If you originally sold an option, then you want it to expire worthless because then you get to keep the credit you received from the premium. Since a seller wants options to expire worthless, the passage of time is a seller’s friend and a buyer’s enemy. If you bought, the premium is nonrefundable even if you let the it expire worthless. As it gets closer to expiration, it decreases in value.

It is Important to note that most options traded on u.s. exchanges are American style. In essence, they differ from European options in one main way. American style options can be exercised at any time up until expiration. In contrast, European style options can be exercised only on the day they expire. All the options of one type (put or call) which have the same underlying security are called a class of options. For example, all the calls on ibm constitute a class. All the options that are in one class and have the same strike price are called a series. For example, all ibm calls with a strike price of 130 (and various expiration dates) constitute a series.

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The Problem With Greece

Can Greece leave the Euro and the rest of the world keeps moving along? Turmoil in Greece and a call by the leftist Syriza Alexis Tsipras to reverse what he calls ‘barbarous austerity” has put the future of the entire Eurozone in doubt. While it is unlikely that Mr. Tsipras will be able to form the necessary coalition to gain power, the uncertainty about Greece’s future plans could hurt the Euro.

Pressure brought on by voters in Greece to try to roll back plans to cut the budget and pay its bills could destroy the European Central Bank plan to avoid a total default. Now the question is whether a Greek exit would be catastrophic or is it destined to happen regardless.

The fear of a Greek exit has not been just about Greece but fear of contagion. If Greece exits the Eurozone, what will happen to other weak members of the zone. If Greece is allowed to just default and walk away after taking others cash that they lent to Greece in good faith, others will have a precedent for an exit strategy. The question of moral hazard now comes into play. If Greece can take the EU money and then walk away, why then would another EU country move to help another EU member?

Of course this raises the larger question of the problem....Read the entire article.

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Equities Fight to Hold Up While EU & US Data Give Mixed Signals

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Investors and traders just can’t seem to catch a break when it comes to economic news. For example Tuesday in the United States we saw strong ISM manufacturing numbers which surprised the market. The numbers were way above expectations and it triggered a feeding frenzy in US based investments like stocks and the green back.

The following session Italy reported terrible PMI and unemployment rate numbers which took most of the wind out the European and US stocks. One day the data is great, next day it’s bad…

The strong numbers in the US have everyone including myself thinking that this week’s jobless claims (unemployment rate) will be down. If this is the case then we will see stocks jump along with the dollar, much like what we saw trader do last Tuesday which is what Jim Cramer says best – BUY BUY BUY.

Normally we do not see the dollar index rally along with stocks but if EU continues to show signs of weakness then it is very likely the dollar and equities inverse relationship could decouple. Reason being investors around the globe will focus their money on the more stable US investments like the dollar and US stocks.

The Dollar is Trading at a Major Tipping Point....Read the entire article.


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Another Oil Price Shock, Another Global Recession?

Brent crude ended trading above $120 a barrel on Friday, April 13, while WTI crude on NYMEX for May delivery settled at $102.83 a barrel.  Oil has traded above $100 for all but a couple of days in the past year (see chart below).  This persistent high oil price has many concerned to start threatening a nascent recovery of the global economy.

Studies show that historically, around 90% of US recessions post World War II were preceded by oil price shocks.  The most recent occurrence took place when oil more than doubled in price from January 2007 to July 2008 due to a sharp increase in Chinese demand.  The pullback of US consumer and corporate spending already put a drag on economic growth before the subprime induced financial crisis closed the deal on the Great Recession.

Analysts generally see the $120-130 level as a price that would prompt consumer and corporate to cut back on spending sharply, and hurt the recovery and growth of key economic sectors. A recent Reuters survey of 20 equity strategists put $125 a barrel as the point economy and stock markets could start to suffer.

The most recent study on the link between oil price and economic recession came from energy industry consultancy Wood Mackenzie (WoodMac) published earlier this month.  The chart below from WoodMac illustrates "the mechanism" of how an oil price shock would derail the global economy. 

According to WoodMac's model,

".... the US will fall into recession within 12 months if WTI increases to $130 per barrel and the price remains elevated. If WTI reaches $150 per barrel and remains elevated, recession will be more pronounced with US GDP estimated to contract 0.4% in 2013."

U.S. domestic petroleum products are priced off of Brent since WTI has become a less relevant oil price marker due to the inventory glut at pipeline capacity challenged Cushing, OK depressing the WTI price.  So using the current spread between WTI and Brent of around $15-$20, WTI $130 would suggest Brent at about $150 range.  Brent futures already hit $128.40 a barrel, the highest since 2008, in early March, but has since given back some of the gains.. 

However, the difference between now and 2008 is that when oil spiked to almost $150 in 2008, there was a strong demand from China and a real shortage of supply, whereas the current world oil market is a lot more balanced than the current Brent oil price suggests.

IEA (International Energy Agency) said in its monthly report that there had potentially been a rise in global oil stocks of 1 million barrels per day (bpd) over the last quarter, and the impact on prices had not yet been fully realised.  Reuters quoted the IEA that:

"Easing first quarter 2012 fundamentals have seen prices recently lose most of the $5 per barrel they gained in March. The muted impact so far is partly because much of this extra supply has been stockpiled on land or at sea."

Rather than reflecting market fundamentals, dollar prices for Brent crude, up more than 15% this year, has been pushed up mainly by fears about Iran, and the loss of supply from three relatively small oil producing countries--Syria, Yemen and South Sudan--adding to the supply worries.  In other words, the oil price is bid up primarily by trading actions on the geopolitical factors (chiefly Iran). 

Meanwhile, Saudi Oil Minister Ali Al Naimi said on Friday, April 13 in a statement during a visit to Seoul that

“We are seeing a prolonged period of high oil prices. We are not happy about it. (The Kingdom of Saudi Arabia) is determined to see a lower price and is working towards that goal.” 

“Fundamentally the market remains balanced — there is no lack of supply.  Saudi Arabia has invested a great deal to sustain its capacity, and it will use spare production capacity to supply the oil market with any additional required volumes.”

Naimi earlier this year indicated $100 a barrel as an ideal price for producers and consumers earlier this year.

Chart Source: Reuters.com

Typically, oil price shock occurs when price goes out of the normal range.  Currently, oil is not trading at an unprecedented level as in the case of 2008, which is hard to hit given the projection of a subdued global GDP, weak oil demand outlook, and an eventual resolution of the Iran situation.

Thus we believe oil has gotten way ahead of itself, and could experience a correction later this year and in the next three years or so.  End user behavior change is starting to manifest, and the latest CFTC trading position reports already showed that money managers cut their net-long position roughly 12% in light, sweet crude-oil futures and options (see chart above).  (Brent already went down to $118.57 on Monday, April 16.)

So no, unless something totally unexpected shocks the oil price into no man's land, WTI and Brent are unlikely to hit the levels that could possibly bring about a global recession any time soon.  In fact, among the major possible drivers of a global recession, European economic and debt crisis looks to be the greater risk than an oil price shock. 


Posted courtesy of AsiaBlue at Econmatters

Stalemate Between European Policy Makers Holds Crude Oil Bulls Back

March crude oil posted an inside day with a lower close on Tuesday. Today's setback was triggered by a stalemate between European policy makers and Greek bondholders over debt relief increased concern that the European credit crisis will spread. The low range close sets the stage for a steady to lower opening on Wednesday.

Stochastics and the RSI are neutral to bearish signaling that sideways to lower prices are possible near term. If March extends this month's decline, December's low crossing at 92.95 is the next downside target. Closes above the reaction high crossing at 102.24 are needed to confirm that a short term low has been posted.

First resistance is the reaction high crossing at 102.24. Second resistance is this month's high crossing at 103.90. First support is Monday's low crossing at 97.40. Second support is December's low crossing at 92.95.

With a Chart Analysis Score of -60 today, this market has moved into a trading range. We are longer term positive on this market, however it must move over resistance at $104 to get its upside momentum into high gear. With only our monthly Trade Triangle in a positive mode, we expect we will see further market consolidation in crude oil. Long term traders should be long this market with appropriate money management stops.

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Will The Dollar Ruin The Santa Claus Rally in the S&P 500?

Experienced traders recognize that volume typically dries up going into the holiday season. Light volume and the holiday seasonality generally push equity prices higher. The discussion of whether Santa Claus comes to Wall Street has arrived in earnest.

I do not envy Santa as he has the most arduous task of determining if Wall Street was naughty or nice. I suppose it depends on whether he reviews recent performance, or if past performance comes into play. Clearly coal will likely be found in a few stockings soon enough. If I were John Corzine, I would not expect to get a lump coal, but something far worse potentially.

In all seriousness, the bullishness has gotten pervasive in the media and economic data points such as unemployment and consumer credit have improved according to the government. One way to gauge investor sentiment is to look at the weekly advisor sentiment numbers courtesy of Bloomberg and Investor’s Intelligence.

According to this week’s advisor sentiment numbers, advisors who are bullish advanced to 47.4% from 44.2% last week. Bearish advisors dropped to 29.5% from 30.5% from the previous week. The 29.5% bearish data point matches a level that has not been seen in nearly 4 months. Bullishness has clearly become the leading expectation in the marketplace.

Only one asset has the opportunity to be “The Grinch” and ruin Christmas on Wall Street. If the U.S. Dollar rallies sharply, risk assets are certain to get hammered lower. In addition to the bullish tenor of market participants, most market pundits and gold bugs believe strongly that the U.S. Dollar is doomed fated for lower prices.

When I look at the long term momentum of a stock or commodity contract I will look at a monthly chart and plot the 12 month moving average against the price action. While it seems simple, equity and futures positions adhere to the 12 month moving average quite closely in many cases. The analysis is very simple as prices above the 12 month moving average equate to bullishness and prices below the moving average predict lower prices. The monthly chart of the Dollar Index futures is shown below:

As can be seen above, the Dollar Index futures are showing strength currently. The 12 month moving average is starting to flatten out which is also a bullish indicator. When looking at the daily time frame we can see that price action is trading inside a wedge pattern and is bouncing higher off of support:

An additional catalyst that could push the U.S. Dollar higher is the economic tragedy that is Europe. European political leaders need to come up with a series of strong solutions that will stabilize their economic crisis otherwise the Euro will weaken further. A weakening or potentially crashing Euro will push buyers back into the U.S. Dollar. This would in turn place downward pressure on equities and commodities.

S&P 500

On Thursday the S&P 500 flushed over 2% lower by the close as the European Central Bank disappointed investors with an expected 0.25% rate cut and no new bond purchase announcements. The bulls will tell you that the Thursday the week prior to monthly option expiration usually is volatile and price direction is generally in the opposite direction of the primary trend. We will find out next week whether that axiom holds true. The daily chart of the S&P 500 is shown below:

The strength of Thursday’s move is not going to easily be reversed. The European leaders need to shock the market with tangible decisions and launch a major offensive against their growing fiscal issues. If European leaders disappoint investors, the reaction to the news could be a violent selloff that leaves bulls flatfooted next week.

Those who are leaning long in size should consider that their trading capital is being leveraged on the hope that European leaders can come to a groundbreaking agreement. I will be in cash watching the price action in the S&P 500. However, once the dust settles and others have done the heavy lifting, I will likely get involved with a directional trade. Until then, I am just going to ponder if I were Santa, would Wall Street get a present or a lump of coal?

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J.W. Jones

Rigzone: Crude Slides 2.1% On European Debt Worries

Crude oil futures fell 2.1% to near $98 a barrel Thursday, posting the biggest decline in three weeks on continued worries about Europe's sovereign debt.

Prices had posted early gains, approaching $102 a barrel, after a larger than expected drop in new claims for U.S. jobless benefits. The Labor Department said benefits filings in the week ended Dec. 3 fell by 23,000 and were at the lowest level in nine months. Economists had expected a 7,000 decline in the week.

But the weight of concerns, as European leaders begin a two day summit meeting, hit equities price and crude tumbled. Oil, like all global markets, has been gripped by concerns in recent months that the crisis in European could trigger a global economic slowdown.

Those concerns were especially evident in the heating oil futures market Thursday, traders said, as prices fell to their lowest level since Nov. 25 on fears of a potential slowdown in U.S. exports of related diesel fuel. Latest U.S. government data show that 42% of record high exports of distillate fuel (diesel/heating oil) in September were bound for Europe.....Read the entire article.


Gold’s 4th Wave Consolidation Nears Completion and Breakout

Risk Surrounds Gold and the SP 500

By JW Jones - Options Trading Signals.com

The current trading environment is one of the most difficult that I can recall in recent memory. Risks abroad regarding the European sovereign debt crisis is keeping market participants on edge as headline risk seemingly surrounds traders at every turn.

In addition to the risk posed by Europe, the market’s reaction to the Congressional Super Committee’s upcoming statements also poses risks. As it stands now, the media is reporting that the committee is in gridlock and has yet to compromise. The deadline for the Super Committee is Wednesday, November 23^rd. The gridlock leads to uncertainty, and Mr. Market hates uncertainty. High levels of uncertainty corresponds with increased volatility levels, thus caution is warranted.

Recently I have been actively trading around the wild price action, but I have been utilizing smaller position sizes in light of the elevated volatility levels. In addition to the smaller position sizes, I have been aggressively taking profits and moving stops in order to protect trading capital.

This past week, members of my service enjoyed two winning trades. We were able to lock in gains on a SPY Put Calendar Spread for a nice 20% gross gain. On Friday we closed a USO Put Calendar Spread for a gross gain of 17%. These trades were relatively short term in duration, but the gains they produced were strong.

Both trades took advantage of increased volatility which resulted in enhanced profits. If volatility remains elevated going forward which I expect, these types of trades will offer great risk / reward going forward. Volatility is an option traders friend, and this past week members of my service were able to lock in some strong gains with relatively muted levels of risk.

Gold Futures

I have not written much about gold recently as I have honestly not seen a great deal of opportunity in either direction there. The price action has been quite volatile, but this past week we saw gold futures sell off sharply. I believe the explanation for the selloff is partially due to strength in the U.S. Dollar. The daily chart of the U.S. Dollar Index is shown below:

The recent selloff in gold can likely be attached to the increase in margin calls around the world as a likely consequence of the MF Global bankruptcy. Uncertainty surrounds the commodities market as the collapse of MF Global has interrupted traditional capital flows and broad based volume around the world. The MF Global situation continues to provide a negative headwind for financial markets in general.

I continue to be a long term bull regarding precious metals as nearly every central bank is either printing money deliberately or is increasing the money supply through quantitative easing. With multiple calls coming out of Europe over the weekend for the European Central Bank to print money to monetize European sovereign debt, it may not be long before the ECB begins their own quantitative easing program. In the long term this can only mean higher prices for gold.

Right now the short term looks bearish for gold as the daily chart of gold futures shows gold tested near the top of a recent rising channel and failed. The selloff was strong, but  a pullback here makes sense from a technical perspective. The daily chart of gold is shown below:

The longer term time frame continues to remain technically positive for the yellow metal. As long as gold prices hold in their multi-year rising channel, higher prices remain likely. Right now the $1,500/ounce price level needs to hold as support if the bulls are going to remain in control in the long term time frame. The weekly chart of gold futures shown below illustrates the long term rising channel:

Right now we are in a seasonally strong period for gold. I am going to be watching closely in coming weeks for a solid entry point to get long the yellow metal for a longer term time frame. Right now the short term remains bearish, but the longer term is bullish from technical and fundamental viewpoints.

S&P 500

The S&P 500 Index sold off sharply during the past week. In my most recent article, I discussed two key price levels to monitor to the downside. The key support levels were the 1,230 and 1,190 price levels respectively. The bulls need the 1,190 area to hold as support to give them any chance for a “Santa Claus Rally” into year end.

Last week the S&P 500 Index closed below the 1,230 support level meaning the 1,190 area has to hold. Otherwise, we could see a sharp selloff into the end of the year. The daily chart of the S&P 500 below illustrates the key support levels:

The S&P 500 looks vulnerable to the downside presently. However, headlines coming out of Europe and/or the Super Committee this week could push prices higher. The key pivot line remains around the 1,257 price level on the daily chart. If the bulls can regain the 1,257 price level on a weekly close a test of 1,290 will become more likely. However, as long as prices remain below 1,230 and 1,257, the S&P 500 is vulnerable to additional downside.

I would not be shocked to see the S&P 500 push higher this week to work off short term oversold conditions. Truncated weeks result in lower than average volume which generally favors the bulls. However, in this environment anything could seemingly happen. Risk is high in either direction.

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Phil Flynn: Kicking The Cannes Down The Road

Global markets are trying to recover as the ECB provides some cover for the Greeks with a surprise rate cut against a backdrop of some better than expected US economic data. Europe was trying to continue to kick the Greek can down the road and tried to end the charade with a package to head off a Greek default.

Greek PM Papandreou created a world of turmoil proposing a referendum of the EU handouts as the markets gyrated headline after headline. The Greek people want a bailout but they don't want to make the spending cuts that will be necessary. Austerity is no fun, especially when you think you hold Europe and the world hostage and that you can still have your cake and eat it too.

Rumors that Papandreou would resign or that the referendum was off the table created wild swings and crazy things. Yet ECB cut rates helped restore sanity in an insane world.

The market also hoped that the G20 would do the Cannes can and help provide confidence to the global market place. The AP reports, "The United States, China, Germany and other major rich and emerging economies have pledged to fight cross border tax evasion under an agreement approved Friday, which supporters say could raise tens of billions of dollars at a time when indebted European nations are scrambling for more revenue.

The deal approved during the Group of 20 summit adds to a marathon campaign by the United States and the European Union to pressure Switzerland and other tax havens to scrap practices they say help wealthy individuals and companies hide income. Supporters say the agreement could help governments collect tens of billions of dollars in taxes on previously hidden income......Read the entire article.


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Rigzone: Crude Rises On Host Of Positive Economic News

Crude oil futures rose in volatile early trading Thursday on a host of bullish economic news, including a drop in initial jobless claims, an increase in business productivity and a European interest rate cut.

Light, sweet crude for December delivery was up $1.49, or 1.6%, at $94.00 a barrel on the New York Mercantile Exchange. Brent crude on the ICE Futures Europe exchange was up $1.28, or 1.2%, at $110.62 a barrel.

The U.S. said initial jobless claims fell 9,000, to 397,000 in the week ended Oct. 29, slightly lower than analyst expectations of 400,000. Productivity for the quarter was up 3.1% at an annualized rate, and the ECB reduced interest rates by a 0.25 percentage point to 1.25%.

Summit Energy analyst Matt Smith called the European Central Bank's move an "absolutely fabulous curveball" and said it would likely be good for oil prices. "It shows that the ECB not only acknowledges the frailty of the region's economy, but is willing to take whatever steps needed to promote stability," he said in a note......Read the entire Rigzone article.


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Crude Oil Declines Below $90 on China Manufacturing Slowdown, European Debt

Crude oil fell below $90 a barrel for the first time in a week in New York on speculation commodity demand will falter as Chinese manufacturing slows and European leaders struggle to contain the region’s debt crisis.

Futures slid as much as 3.8 percent, after posting their biggest gain last month since May 2009, amid signs of higher production from OPEC members as Libya bolstered exports. China’s Purchasing Managers’ Index fell for the first time in three months in October, a report showed. Greek Prime Minister George Papandreou said he will submit the European Union’s new financing deal for a national referendum.

“The list of things weighing on the market is long,” said Olivier Jakob, managing director at Petromatrix GmbH in Zug, Switzerland, who correctly predicted that this year’s oil rally would stall. “There’s the Chinese PMI, the Greek referendum taking EU leaders by surprise, the euro-dollar collapsing.”

Oil for December delivery declined as much as $3.56 to $89.63 a barrel in electronic trading on the New York Mercantile Exchange and was at $90.56 as of 12:48 p.m. London time. Futures fell 0.1 percent yesterday and climbed 18 percent in October......Read the entire article.


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Phil Flynn: A Bullish Start

The Fed is laying the ground work for more quantitative easing in the form of buying back mortgage backed securities. Europe is supposedly closer to a deal to save the Eurozone, a strong PMI in China and the uncertainty surrounding the death of Saudi Arabia’s Crown Prince Sultan bin Abdulaziz Al Saud is impacting the energy sector. The big question is why oil isn't higher than it already is.

China's flash PMI, rose to 51.1 showing expansion in the Chinese manufacturing sector for the first time since mid-summer. The first reading on Chinese manufacturing was an improvement from the final September reading of 49. Still some wonder why we have not seen China demand for oil increase.

Reuters News reports, "China's implied oil demand rose a tepid 1 percent over a year earlier in September at about 8.9 million barrels per day, the lowest rate so far this year, according to Reuters calculations based on preliminary official data released on Tuesday. Implied oil demand was calculated using China's refinery crude throughput plus net imports of refined fuel but excluding changes in fuel inventories, which China rarely publishes Fuel demand in the world's second largest oil user has, since June, eased off from the double-digit growth pace seen since late last year, as the Chinese economy grew less rapidly, but China still contributed more than half of the global incremental oil demand.

If China oil demand slows to single digit growth then prices should ease. On top of that the Chinese government has taken steps to try to rein in inflation. That potentially means that demand for oil has peaked or the Chinese are using reserves that will have to be replenished! Stay tuned!

Now the question is whether or not China will buy European bonds. Reuters News reports that French President Nicolas Sarkozy backed down in the face of implacable German opposition to his desire to use unlimited European Central Bank funds to fight the crisis. Instead, the euro zone may turn to emerging economies such as China and Brazil for help in underpinning its sickly bond market. Still the market is optimistic that this time, really this time, the Euro Zone will make a plan that will really work.



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The Euro Zone Wags The Gold and Silver Dog

If Greece defaults and the European situation begins to spin out of control where will money flow? It would not make sense for market participants to buy Euro’s during a default regardless of whether the default it structured or not. In fact, it is more likely that European central banks and businesses would be looking to either hedge their Euro exposure or convert their cash positions to another currency all together.

Some market pundits would argue that gold and silver would likely benefit and I would not necessarily argue with that logic. However, the physical gold and silver markets are not that large and depending on the breadth of the situation, vast sums of money would be looking for a home. The two most logical places for hot money to target in search of safety would be the U.S. Dollar and U.S. Treasury’s.

The U.S. Dollar and U.S. Treasury obligations are both large, liquid markets that could facilitate the kind of demand that would be fostered by an economic event taking place in the Eurozone. My contention is that the U.S. Dollar would rally sharply along with U.S. Treasury’s and risk assets would likely selloff as the flight to safety would be in full swing.

To illustrate the point that the U.S. Dollar will likely rally on a European crisis, the chart below illustrates the price performance of the Euro compared to the U.S. Dollar Index. The chart speaks for itself:



Clearly the chart above supports my thesis that if the Euro begins to falter, the U.S. Dollar Index will rally sharply. In the long run I am not bullish on the U.S. Dollar, however in the case of a major event coming out of the Eurozone the Dollar will be one of the prettiest assets, among the ugly fiat currencies.

The first leg of the rally in the U.S. Dollar occurred back in late August. I alerted members and we took a call ratio spread on UUP that produced an 81% return based on risk. I am starting to see a similar type of situation setting up that could be an early indication that the U.S. Dollar is setting up to rally sharply higher in the weeks ahead. The daily chart of the U.S. Dollar Index is shown below:



As can be seen from the chart above, the U.S. Dollar Index has tested the key support level where the rally that began in late August transpired. When an underlying asset has a huge breakout it is quite common to see price come back and test the key breakout level in following weeks or months. We are seeing that situation play out during intraday trade on Friday.

We are coming into one of the most important weeks of the year. Several cycle analysts are mentioning the importance of the October 26^th – 28^th time frame as a possible turning point. I am not a cycle expert, but what I do know is that we should know more about Europe’s situation during that time frame. It would not shock me to see the U.S. Dollar come under pressure and risk assets rally into the October 26th – 28^th time frame. However, as long as the U.S. Dollar Index can hold above the key breakout area the bulls will not be in complete control.

If I am right about the U.S. Dollar rallying higher, the impact the rally would have on gold and silver could be extreme. While I think gold would show relative strength during that type of economic scenario, I think both metals would be under pressure if the U.S. Dollar started to surge. In fact, if the Dollar really took off to the upside I think both gold and silver could potentially selloff sharply.

As I am keenly aware, anytime I write something negative about gold and silver my inbox fills up with hate mail. However, if my expectations play out there will be some short term pain in the metals, but the selloff may offer the last buying opportunity before gold goes into its final parabolic stage of this bull market. The weekly chart of gold below illustrates the key support levels that may get tested should the Dollar rally.

For quite some time silver has been showing relative weakness to gold. It is important to consider that should the U.S. Dollar rally, silver will likely underperform gold considerably. The weekly chart of silver is illustrated below with key support areas that may get tested should the Dollar rally:



Clearly there is a significant amount of uncertainty surrounding the future of the Eurozone and the Euro currency. While I do not know for sure when the situation in Europe will come to a head, I think the U.S. Dollar will be a great proxy for traders and investors to monitor regarding the ongoing European debacle.

If the Dollar breaks down below the key support level discussed above, gold and silver will likely start the next leg of the precious metals bull market. However, as long as the U.S. Dollar can hold that key level it is quite possible for gold and silver to probe below recent lows.

Both gold and silver have been rallying for quite some time, but the recent pullback is the most severe drawdown so far. It should not be that difficult to surmise that gold and silver may have more downside ahead of them as a function of working off the long term overbought conditions which occurred during the recent precious metals bull market.

Make no mistake, if the Dollar does rally in coming months risk assets will be under significant selling pressure. While the price action will be painful, those prepared and flush with cash will have an amazing buying opportunity in gold, silver, and the mining complex. Right now, risk remains excruciatingly high as the European bureaucrats wag the market’s dog.

Subscribers of OTS have pocketed more than 150% return in the past two months. If you’d like to stay ahead of the market using My Low Risk Option Strategies and Trades check out OTS at Options Trading Signals.com and take advantage of our free occasional trade ideas or a 66% coupon to sign up for daily market analysis, videos and Option Trades each week.

JW Jones

Here's J.W.s Latest Articles

Phil Flynn: Seven Days

It's now 7 days to fiscal sanity, or is it the alternative? It is do or die with an October 23rd deadline. A deal to save Europe which has to be done in seven days and France and Germany have to do the heavy lifting.

The G20 told the EU that they have one week to come up with a "comprehensive plan" that includes the details on how much of a haircut Greek bondholders will have to take and a plan to recapitalize all of the debt ridden European banks. It seems that all are agreed and Europe will be saved yet again.

Yet not so fast. Perhaps that 7 day deadline is not as hard and fast as the markets at first believed. Dow Jones said that German Finance Minister Schauble said the upcoming EU summit will not present an ultimate solution for the crisis. What?

The bottom line is that oil is living and dying with the twists and turns in this European nightmare. If Europe fails to come up with a viable plan then the word sinks back into crisis mode and the demand for oil will plummet.

Iranian revelations are also disturbing. Fears that perhaps this could escalate to some type of military conflict could keep some upward pressure on the Brent WTI spread.



You can get a free trial of Phils daily trade levels. Just email him at pflynn@pfgbest.com.

Phil Flynn: Triple Crown Slowdown

Well the Department of Energy made is official as all three reporting agencies are seeing a slowdown in energy. First OPEC then the International Energy Agency and now the Energy Information Agency arm of our own Department of Energy! Yet what be a bit more unnerving to the oil market may be some slow data and ominous words out of China.

A report on China exports showed a 17.1 percent increase that was way below market expectations and from August reading of 24.5 percent growth. The reading was so disappointing that it came with a warning from the Chinese Custom Agency to be prepared for severe challenges going forward. Sprinkle on top more concerns coming out of the Euro zone and recent oil price surge might be coming under pressure.

The mood shift in the market has really been evident in the Brent WTI spread. The spread exploded again as the Slovakian vote seemed to suggest that Europe might not implode. At the same time we're rolling over with strength in the Brent as well as the market putting on a risk trade because of the rising tensions over the Iranian assassination attempt allegations.

The Energy Information Agency says the expected pace of global oil consumption growth for 2011 is slightly lower in this month's Outlook, while projected total supply in 2011 is higher, resulting in some easing of oil market tightness. Despite this easing, EIA continues to expect markets to rely on inventories to meet some consumption growth in 2011 and 2012.

Crude oil consumption growth from countries outside of the Organization for Economic Cooperation and Development (OECD) is projected to outpace the growth in supply from producers that are not members of the Organization of the Petroleum Exporting Countries (OPEC), implying a need for OPEC producers to increase their output to balance the market in 2011 and 2012.

Oil prices continue to face upward price pressure due to supply uncertainty and downward price pressure because of lowering expectations of economic growth. Upside uncertainty to the crude oil price outlook remains as a result of ongoing unrest in oil producing regions. Heightened turmoil in Syria, which produced an average 400 thousand bbl/d in 2010, and the potential for more sanctions on the country's energy sector is one source of risk to non OPEC supply.

At the same time, downside demand risks predominate, as fears persist about the rate of global economic recovery, contagion effects of the debt crisis in the European Union, and other fiscal issues facing national governments. On the supply side, there may be downward price pressure if Libya is able to ramp up oil production and exports sooner than anticipated.


Catch Phil every weekday on the Fox Business Network. You can also sign up for a trial of Phil's trade levels by emailing him at pflynn@pfgbest.com

Oil N' Gold: Drop in Crude Inventory Fails to Alter the Downtrend

Total crude oil and petroleum products stocks declined -4.63 mmb to 1074.56 mmb in the week ended September 30. Crude stockpile fell -4.68 mmb to 336.28 mmb as 3 out of 5 PADDs recorded stock draws and Gulf Coast inventory plunged -5.24 mmb. Cushing stock also fell -0.83 mmb to 30.09 mmb. Utilization rate fell -0.1% to 87.7%.

Gasoline inventory dropped -1.14 mmb to 213.72 mmb although demand slipped -0.06% to 8.989M bpd. Imports dropped -6.65% to 0.51M bpd while production edged up +0.08% to 9.29M bpd during the week. Distillate inventory slipped -0.74 mmb to 156.93 mmb as demand jumped +7.39% to 4.10M bpd. Production gained +2.37% to 4.67M bpd while imports soared +36.67% to 0.21M bpd during the week.

WTI crude oil price rebounded to 78.84 after the report as crude inventory surprisingly fell. Distillate and gasoline stockpiles were also down during the week. However, the near-term outlook remained dismal amid global economic concerns and worries about European sovereign crisis.


A Comparison between API and EIA reports at Oil N' Gold


Complimentary Trend Analysis For Stock, Futures, And Forex

Bloomberg: Crude Oil Gains for First Time in Three Days

Crude oil rose for the first time in three days as advancing European equity markets eased concern that the region’s debt crisis is damping demand for fuel, while investors bet that some supplies may be at risk.

Futures in New York gained as much as 1.4 percent, halting a slide of more than 4 percent in the previous two trading days, as the Stoxx Europe 600 index advanced 1.6 percent. Opposition fighters in Libya continued to battle loyalists at the town of Bani Walid and the city of Sirte, while anti government protests in Yemen left 50 people dead this week.

“Given the scale of the price fall, we are seeing some buying interest out there,” said Amrita Sen, a London based analyst at Barclays Plc. “The fundamentals still look robust with demand, even after slowing down, outpacing supply growth.”

Oil for October delivery on the New York Mercantile Exchange gained as much as $1.21 to $86.91 a barrel and was at $86.75 a barrel at 12:48 p.m. London time. The contract fell 2.6 percent yesterday and will expire today. The more actively traded November future was up $1.02 at $86.83 a barrel.

Brent crude for November settlement was up $1.40 at $110.54 a barrel on the ICE Futures Europe exchange in London. The contract yesterday fell 2.7 percent to $109.14 a barrel. The European benchmark future was at a premium of $23.67 to the November price of West Texas Intermediate, compared with a record settlement of $26.87 on Sept. 6......Read the entire Bloomberg article.


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