[MrBill]

Sorry for the lack of posts. A very frustrating trading week and busy with some other stuff.

First a summary of Wednesday's & Thursday's numbers, which I am still mulling over.

Crude down 600K to 323.9 vs +1.2 mio bbls f/c
Gasoline down 2 mio to 225.2 vs +1.9 mio bbls f/c
Distillates down 3 mio to 133.3 vs -4.2 mio bbls f/c
Heating oil stocks down 2.7 mio to 50.8 mio

Net down 8.3 mio bbls vs down 1.1 mio bbls f/c

Or down almost 8X f/c's, so it was quite surprising that markets chose to focus on lower than expected draws in distillates and ignore the overall draw in inventory.

Imports up 37k bpd to 9.58 mbpd
Product imports up 21k bpd to 3.25 mbpd
Refinery use down 0.7% to 86.6%

Gasoline demand up 3.6% to 9.07 mbpd
Distillate demand up 7% to 4.50 mbpd
Total demand up 5% to 21.17 mbpd

So supply down, imports lower than expected, demand higher and the market went down even though the IEA cut world supply and increased its OECD demand forecasts, while Chinese demand surged 9.3% in 2006.

This on top of nat gas inventories this week that showed an almost record drop in inventories of -259 bcf on cold weather.

The market is either very complacent on inventory or they are predicting lower economic activity, which is supported by today's lower housing starts. They fell 14.3 percent while building permits dropped 2.8 percent. Causing the 10Y UST to rally to 4.69% and the US dollar to strengthen ever so slightly to $1.3100 from recent weakness.

We are having an afternoon rally in the crude today, but this week's close looks to be lower than last week. From a purely technical point of view this is bearish crude prices.

The ABC correction of the bull rally that ended last summer at $78.40 would look like this.

A - $78.40 to $49.80 = $28.60

$28.60 x 0.382R = $10.93

B - $49.80 + $10.93 = $60.72

last Friday's high was $60.80 = 0.382R

C - $60.80 - $28.60 = $32.20

if C is at least as long as A as would be common in an ABC correction.

This scenario is negated IF we take out $60.80 before we take out $49.80, but the key will be holding support above $55.90. If $55.90 holds then it might be construed that instead of being in an ABC correction that $49.80 was in fact the low and we are instead in a 12345 type rally. A correction to $55.90 would be the 4th leg of the sequence with a break of $60.80 being the 5th wave.

So much for technical analysis, I just wanted to point out that from a technical point of view at least that lower prices were possible and with the end of winter we do not have a weather variable to support demand or prices until later on in the hurricane season. And some are calling for lower prices.

$this->bbcode_second_pass_quote('', ' ') Oil will drop more than 30 percent to
$40 a barrel in March and may drop to $30 as rising prices for
storing crude lead to a `breaking point' that forces speculators
to sell, Sanford C. Bernstein & Co. said.
Oil will slide because greater investment in commodity
futures has driven the market into contango, according to analysts
led by London-based Neil McMahon. The phenomenon occurs when
futures prices rise above spot prices, often reflecting handling
or storage costs.
``As storage fills up, storage costs rise and the contango
widens,'' the analysts said in a February report. ``At some point,
investors will reallocate money away from the commodity funds,
causing futures prices to fall.''
Last month, New York-traded crude fell to $49.90 a barrel as
warmer-than-expected weather spread across the U.S. and fuel
inventories surged. Crude has since risen on a second production
cut by the Organization of Petroleum Exporting Countries and a
cold snap in the U.S., the world's largest energy consumer.
The ``breaking point'' could come in March if Saudi Arabia,
OPEC's largest producer, fails to cut production below 8 million
barrels per day, the level needed to keep the market balanced, the
Bernstein analysts said. Spare capacity would rise, widening the
contango and driving investors out.

[MrBill]

A very quiet start to the week with the US on holidays. WTI is hugging $59 per barrel with a few weak attempts at either side of the range. More than likely the strong close to the week ending Friday was due to position squaring and traders closing their short positions ahead of the 3-day long weekend. At least according to the COTS report on open positions. Still, at least from the technical side, the picture is constructive.


OPEC also sees stronger demand for its crude in 2007.
$this->bbcode_second_pass_quote('', 'O')PEC, source of more than a third of the world's oil, on Thursday raised an estimate of demand for its crude in 2007, reflecting a lower supply forecast from countries outside the group.

OPEC expects demand for its crude in 2007 to average 30.25
million barrels per day, up from the 30.09 million bpd previously expected, the exporter group said in its Monthly Oil Market Report for February.

The Organization of the Petroleum Exporting Countries also said global oil demand would grow by 1.2 million bpd, or 1.5 percent, this year, little changed from last month's estimate. Milder-than-usual temperatures earlier this year in top oil consumer the United States trimmed demand for heating fuel and OPEC said a return of warmer weather could prompt a cut in expected oil demand.

"If warmer temperatures return for the remainder of the first quarter and the fourth quarter sees a repeat of the current season's mild winter, oil demand growth in 2007 could see a further downward revision," OPEC's report said. "However, the weaker-than-expected performance in non-OPEC supply, due to project delays and unexpected output declines, may be sufficient to offset the decline in the forecast demand."

OPEC's view on oil demand this year is more pessimistic than
that of the Paris-based International Energy Agency, an adviser
to 26 industrialised countries. The IEA this week raised its forecast for 2007 world oil demand growth after revisions to its outlook for China, and told OPEC any further supply cuts could markedly tighten the market.

[MrBill]

Technical weakness. Down 150 points back up 50. Still very weak. No impetus to take it higher. Here is a very interesting geo-political article. Perhaps it does not belong here, but I thought it had good insights about resource competition, if not wars, and in the historical context is a 180 degree change from Japan's post-world war politics.

$this->bbcode_second_pass_quote('', '[')b]Japan's cabinet is set to approve a new energy policy in March that will highlight the development of next-generation nuclear technology and strengthen ties with nations producing oil, natural gas and uranium.
Recycling spent nuclear fuel, increasing dependence on nuclear generation and stepping up ``energy diplomacy'' to boost overseas oil, gas, and uranium assets are pillars of the final draft of the energy policy, distributed at the ruling Liberal Democratic Party's research panel meeting today.
Prime Minister Shinzo Abe's government is under pressure to
address the increasing risks of disruptions to oil and gas supplies amid booming demand from China and India. Increasing reliance on nuclear energy may contribute to cutting Japan's oil and gas dependency.
``We are facing the China issue,'' said Harufumi Mochizuki, head of the agency of natural resources and energy, which falls under the trade ministry, referring to an expected growth in China's oil and gas demand in the years ahead. Mochizuki took part in the energy meeting at the LDP's head office in Tokyo.
The global race for natural resources, declining spare capacity in oil-producing nations and concerns over global warming caused by carbon emissions prompted Japan's government to rework its energy policy, the agency said in a document handed out at the meeting.
The draft policy contains other measures, including promoting energy saving measures, increasing the use of biomass energy, fuel cells, ethanol-blended gasoline, and renewable energy like solar power, according to the document.

Recycling Nuclear Fuel

In November 2006, Japan Nuclear Fuel Ltd., a venture formed by Japanese power companies, produced recycled nuclear fuel for the first time. It produced plutonium-uranium mixed oxide fuel, known as MOX, at its processing plant in Rokkasho, northern Japan.
Recycling the fuel will help the country boost power generated by nuclear plants from about 30 percent currently to above 40 percent without importing additional. The government wants to increase the number of reactors using MOX fuel to 18 by March 2011. The country has 55 nuclear reactors.
Shikoku Electric Power Co., a power producer in southern Japan, got local government approval to use the recycled fuel in October, after Kyushu Electric Power Co., the nation's fifth- biggest generator, got the go-ahead to use the fuel earlier last year.

Energy Diplomacy

Japan's government stepped up efforts last year to clinch closer ties with other Asian nations, and the U.S., to cooperate in energy projects.
The government held ministerial talks in May 2006 with its China to promote energy conservation measures to curb overheated energy demand in the neighboring country.
Abe's immediate predecessor Junichiro Koizumi in August signed an agreement with Kazakhstan's government to jointly develop uranium mines in the central Asian country. Kazakhstan holds 17 percent of the world's uranium reserves, according to the document.
On Nov. 28, Abe agreed to provide President Susilo Bambang Yudhoyono's government with assistance for Indonesia's plans to build nuclear power plants. Yudhoyono, in return, promised to develop closer relations with Japan, and continue supplying oil and natural gas.
Japan imported 62.1 million metric tons of liquefied natural gas in 2006, according to trade reports compiled by the finance ministry. Indonesia shipped 14 million tons to Japan, accounting for 23 percent.

[cube]

$this->bbcode_second_pass_quote('MrBill', 'S')orry bad trading day. Bought and within one hour was stopped out at the bottom of the range. Now we are 150 points higher. That sucks. Uggh! Back tomorrow.

[MrBill]

$this->bbcode_second_pass_quote('cube', '')$this->bbcode_second_pass_quote('MrBill', 'S')orry bad trading day. Bought and within one hour was stopped out at the bottom of the range. Now we are 150 points higher. That sucks. Uggh! Back tomorrow.

[pup55]

COTS


Mr. Bill:

I am still watching the COTS chart. The behavior of the commercial traders is interesting, I think.

For one thing, they have diverged a little bit from their mirror image of the large traders, which is rare in and of itself.

Secondly, they are now still quite close to "zero", which for them, is decidedly bullish. The crossover of the commercial traders and the small speculators line occurred at the start of rallies in April and October of 2005.

It will be interesting to see if this is a signal.

[MrBill]

$this->bbcode_second_pass_quote('pup55', '[')url=http://http://www.freecotcharts.com/charts/CL.htm]COTS[/url]


Mr. Bill:

I am still watching the COTS chart. The behavior of the commercial traders is interesting, I think.

For one thing, they have diverged a little bit from their mirror image of the large traders, which is rare in and of itself.

Secondly, they are now still quite close to "zero", which for them, is decidedly bullish. The crossover of the commercial traders and the small speculators line occurred at the start of rallies in April and October of 2005.

It will be interesting to see if this is a signal.

[MrBill]

Goldman Sach's more bullish outlook has been vindicated as opposed to others like Morgan Stanley that were more bearish on the fundamentals. Certainly a strong technical close to last week and persistant drawdowns in inventory combined with heavy demand have firm up the outlook in the near-term.

$this->bbcode_second_pass_quote('', '
')Further evidence of tighter fundamentals


Most of the volatility in WTI crude oil prices has been concentrated in the longdated timespread, not on price levels

This week WTI crude oil prices closed above $60/bbl for the first time since the beginning of the new year, after having recovered from the big sell-off in mid-January. Over the course of the month, however, crude oil price levels have not changed significantly, starting February at around $59/bbl and trading just below $61/bbl as of yesterday. Instead, volatility has been concentrated in timespreads, with the five-year timespread narrowing by almost 20% this month.

Exceptionally high US petroleum product demand numbers have led to a significant draw in inventories

While refinery inputs declined 416 thousand b/d in the past week, which should account for roughly 3 million barrels of the build in crude oil, petroleum products drew much more heavily-14.8 million barrels week over week-driven by exceptionally strong demand numbers. On net, implied demand for petroleum products was above 22 million barrels per day, the second-highest demand ever recorded, up 5% from year-ago levels.

Strong bunker fuel oil demand has absorbed excess residual fuel oil supplies US residual fuel oil inventories have drawn sharply from high levels as recent strength in natural gas prices relative to residual fuel oil prices has increased demand for the latter. In general, OECD bunker fuel demand has risen significantly, helping absorb excess residual fuel oil supplies.

[MrBill]

I had an interesting conversation with my colleague who trades US equity yesterday evening. On one hand we see that the price of gold is rising. A sign that they are worried about the value of the dollar or inflation or both. On the other hand the yield on the 10-year UST has compressed to 4.62% p.a. and one year LIBOR is just 5.35% down from 5.45% p.a. about a month ago. The bond and money markets are not worried about inflation it seems. Especially after Greenspan’s comments yesterday that the US might be headed for a recession later in 2007.

One way to reconcile the two views of the market because they both cannot be right is to separate them out as being one is a wide perspective based on loads of liquidity fuelling growth and inflation on a global scale lead by Chindia’s fast pace of economic development and need for base metals, commodities and energy.
The other is to focus on US specifics that indicate that the Fed may be done raising rates and if the economy slows they would be prepared to cut rates in response.

If you add both views together, global inflation and a domestic slowdown, you get stagflation. Is it the same benign stagflation that we saw in the 1970s or will it be exacerbated by global financial imbalances?

$this->bbcode_second_pass_quote('', 'M')easured on a rolling 52-week basis, seasonally adjusted M2 rose by 5.6% for the year through February 5, according to Federal Reserve data. That's the fastest annual pace in two years, as our chart below shows.

How fast is 5.6%? For perspective, the economy expanded at a 5.0% annual rate during last year's fourth quarter (measured in seasonally adjusted nominal terms, as per the Bureau of Economic Analysis). The point, dear readers, is that money supply is expanding at a rate faster than the economy's.

[MOCKBA]

$this->bbcode_second_pass_quote('MrBill', 'S')o the Fed, rightly or wrongly, may decide to Hell with it, they may well drop rates and increase money supply further in response to local conditions in the USA, and let the international cards fall where they may!

[MrBill]

Here is a contra-opinion which in many ways makes sense. Think about it? Higher prices were supposed to be bad for economies and especially disasterous for emerging markets. However, as producers of base metals, commodities and oil & gas they have actually done quite well out of higher prices, while the developing world has adjusted to higher prices quite easily. This is not to say that no one would notice $120 crude, but very few seem bothered with oil at $60 per barrel.

$this->bbcode_second_pass_quote('', ' ')-- If you want stock markets to keep
rallying, then root for higher oil prices.
That may sound like the counterintuitive advice of the
decade. After all, traditional economic theory holds that
costlier petroleum usually spells bad news for stocks. Companies'
production costs rise, reducing profit margins. And as more
spending is diverted to gassing up the family car or heating
homes, consumers' disposable income shrinks.
That translates into lower sales and earnings for many
companies unlucky enough to be outside the oil or gas business.
True enough. Yet the massive amounts of liquidity that have
propelled the prices of global stocks, real estate and
contemporary art to stratospheric heights in the past four years
may be altering the assumption that expensive oil is always bad
for financial assets.
From a low of $25.24 on April 29, 2003, the price of a
barrel of West Texas Intermediate crude traded on the New York
Mercantile Exchange has more than doubled to about $60 as of Feb.
22. During the same period, the Standard & Poor's 500 Index rose
59 percent, the Dow Jones Stoxx 600 Index in Europe rallied 94
percent, the MSCI Emerging Markets Index more than tripled in
value, and the Tokyo Stock Price Index has gained 131 percent.
As the price of oil skyrockets, petroleum-exporting nations
become wealthier. In economist-speak, their current-account
surpluses expand. Those petrodollar surpluses are then recycled
to other markets, particularly the U.S., where the flows help
finance the current-account deficit, which was $656 billion
through the first three quarters of 2006.

Cash Stash

Figuring out just where oil exporters stash their cash is
one of the riddles of global finance. That's because many
allocate funds to institutions such as the Kuwait Investment
Authority and external money managers, unlike Asian central
banks, which tend to manage their reserves in-house.
Still, the Federal Reserve Bank of New York in December
estimated that $314 billion, or about a quarter of fuel-
exporters' combined $1.3 trillion in current-account surpluses
from 2003 through 2006, was recycled back to the U.S. directly.
An additional chunk was probably recycled indirectly into
dollars via third parties. ``Purchases of U.S. securities may be
booked largely through intermediaries based in London or offshore
financial centers,'' the International Monetary Fund said in a
report last April. The IMF estimates that about 60 percent of
fuel exporters' official reserves are held in dollar assets.
What's more, fuel exporters are becoming more important in
the recycling business. At $528 billion, their current-account
surpluses in 2006 surpassed Asia's $437 billion for the first
time since the 1970s.

Heads or Tails?

The flip side of higher oil prices leading to rising stock
markets is that declining oil prices may lead to falling
equities. That's because cheaper oil translates into smaller
current-account surpluses in places such as Saudi Arabia, Russia
and Kuwait. That means less money to invest in the U.S. and other
financial markets.
``There will be lower capital surpluses recycled back into
major financial markets, particularly into dollar assets,'' says
Daniel Casali, an economist at London-based consulting firm
Independent Strategy. ``That will lower demand for equities and
bonds and increase the cost of capital, particularly in the U.S.,
the main beneficiary of global capital recycling.''
There are, of course, caveats to the view that oil markets
dictate equity prices. Much depends on why oil prices decline,
says George Magnus, a London-based economic adviser to UBS AG.

Oil Forecasts

``If they fell because of supply increases and a global soft
landing, I suspect the effects on markets would be benign.''
For fuel exporters' current-account surpluses just to match
last year's total, oil this year would have to average about $70
a barrel, compared with a 2006 average of $66.23, Casali says.
At $60 a barrel, oil is now 22 percent below its $77.03
record high on July 14, 2006. Oil this year will cost $60.50 a
barrel, according to the median forecast of 36 analysts in a
Bloomberg survey.
Casali predicts an even lower $55. At that price, the
exporters' surpluses will fall by $152 billion to $376 billion,
he calculates. After adjusting for an IMF forecast of a small
increase in Asian surpluses, he says that capital flows may
shrink by $139 billion.
For a taste of what a pullback in global liquidity might be
like, one could consider Japan's decision last year to tighten
monetary policy. From late March to mid-June, the country's
central bank withdrew $186 billion from domestic lenders, and
Japanese investors responded by cutting their overseas holdings.
From May 9 to June 13, the MSCI World Index fell 12 percent,
while the MSCI Emerging Markets Index plunged 25 percent.

Industries at Risk

Moreover, a 2004 study by the U.S. Federal Reserve found
that 10-year Treasury yields fell 7 basis points for each annual
$10 billion increase in net foreign investment in the U.S. That
implies higher yields, if global capital flows shrink. And if
cheaper oil ignites inflation, central banks may respond by
raising interest rates, further hurting stock and bond markets.
The combination of lower oil prices and rising interest
rates may be especially bad for energy and financial companies,
which have benefited the most from higher oil prices and low
interest rates, accounting for the lion's share of global profit
growth in 2006. Those two industries make up 35 percent of the
value of the MSCI World Index, compared with 20 percent in 2000.
``Should the oil price fall further or even just stay where
it is, global financial markets will lose a valuable source of
liquidity and a major portion of corporate earnings could take a
hit,'' Casali says.
So if you want stock markets to keep climbing, start
cheering for the Arabs, Iranians, Russians and Nigerians, not to
mention the Norwegians and Venezuelans.
Otherwise, run for cover.

[cube]

$this->bbcode_second_pass_quote('MrBill', '.')..you have a lot of money from base metals, oil & gas that is not 'necessarily' flowing into productive assets or projects in Russia to improve its infrastructure and generate future income streams.
...

[MrBill]

$this->bbcode_second_pass_quote('cube', '')$this->bbcode_second_pass_quote('MrBill', '.')..you have a lot of money from base metals, oil & gas that is not 'necessarily' flowing into productive assets or projects in Russia to improve its infrastructure and generate future income streams.
...

[Madpaddy]

My poor baby Tullow Oil has fallen by about 15% in the last 2 days despite the rise in oil prices. Luckily I sold 25% of my holdings last week.

[MrBill]

$this->bbcode_second_pass_quote('Madpaddy', 'M')y poor baby Tullow Oil has fallen by about 15% in the last 2 days despite the rise in oil prices. Luckily I sold 25% of my holdings last week.

[MrBill]

$this->bbcode_second_pass_quote('MrBill', 'U')PDATE: trades I would recommend, but not for the faint of heart.

1. Buy wheat. Sell corn. Historically, corn rarely trades for long at a premium to wheat. Look for ethanol margins to go negative first.

2. Buy yen. Sell euros. The specs are huge yen shorts. Divergence is large on COTS. Look for that to correct. Perhaps after the next G7/G8 meeting.

[buzzard]

I look at what the market calls fundamentals and I can see where one might justify something on the order of $45/ b. ON the other hand, when I look at all of the other things which could effect the price and probably will, then I get a totally different picture. So $80 it is. That may be too low. But I'm not much of a gambler. I have already liquidated everything and hold only land, silver and cash. No paper anything.

BUZ

I'm confused. Isn't this where the party was supposed to be?

[MrBill]

$this->bbcode_second_pass_quote('buzzard', 'I') look at what the market calls fundamentals and I can see where one might justify something on the order of $45/ b. ON the other hand, when I look at all of the other things which could effect the price and probably will, then I get a totally different picture. So $80 it is. That may be too low. But I'm not much of a gambler. I have already liquidated everything and hold only land, silver and cash. No paper anything.

BUZ

I'm confused. Isn't this where the party was supposed to be?

[JustWatch]

I know this may sound overly simplistic, and many here might blow it out of the water very quickly, but I’ll ask it anyway.
Could the oil price, which has been rising for the last few years, be connected to the liquidity that has been rising worldwide the last few years? What I mean is, could more money be flowing out of central banks in order to maintain equilibrium with the rising oil price? The oil price is around $60, but is it just to maintain the status quo with excess cash floating around? And vice-versa?
It just seems to me that this could be all that is happening, and will continue until the crude supply actually gets tighter beyond equilibrium with demand. Could the money supply be trying to play catch-up with rising oil costs? Could the demand for money be rising along with the price of oil? Could it be that interest rates haven’t been rising much yet simply being because the excess money is cycling back into bonds?

If not, then why haven’t the higher oil prices been more difficult to manage? Maybe wages aren’t rising fast enough to keep up with it everywhere, but will start to do this soon? I have the feeling that wage pressure will start to increase in the US soon, but I may be wrong about this as well.
I get these ideas from my understanding that “money=energy.” Since oil is energy, and equivalent to the labor that humans must do in order to earn wages. So money is a “store of energy” or at least that’s what we hope it to be if we put currency under our mattress!

[drew]

Yes liquidity has something to do with oil prices, namely excess liquidity in the form of US dollars. The dollar has declined significantly in relation to most of the world's currencies and acccordingly the price of oil has risen as it is priced in dollars. Some people have said that oil keeps the value of the dollar artificially high. These same folks say that trading in oil using another currency such as the euro would harm the us dollar greatly.

I would say that prices have already had a negative effect on the economies of the world. I too am surprised at how easily things seem to keep trucking along, for the most part. I do believe that the correction of yesterday was just a harbinger of thing to come in the next 12 months. Stock markets cant continue climbing for ever, nor can borrowers keep sinking further into the hole.

Drew