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July 2013

US Oil Imports Hit 13 Year Lows

July 22, 2013 by EconMatters   Comments (0)

By EconMatters

Imports Down 3.5 Million (barrels per day) since 2006
Oil imports are trending down and stand approximately 7.5 million barrels per day, which is the lowest level since the year 2000. This number hit its highest on a 4-week average basis of around 10.5 million barrels being imported back in 2006. 

This is a reduction of 3.5 million barrels per day, and when you start adding these reductions up, one can see the magnitude of oil that is no longer coming to the United States. Take 3.5 million barrels times 7 days in a week, and we get a reduction of 24.5 million barrels of oil for a week. 
Take this number times 4 weeks and we get a reduction in imports of 98 million barrels per month. For the annual reduction we take 98 million barrels of oil times 12 months in a year, and we get a reduction in oil imports of 1 Billion, 176 million barrels of oil annually from the peak level in 2006.
The number is even greater when you add in other imported petroleum products from 2006 besides just strictly oil imports.
This is a reduction of oil imported every year, and when one looks at these numbers on a five, ten year time horizon the numbers became staggering to comprehend. 
This is the real reason the Brent-WTI oil spread has collapsed, not because Cushing Oil inventories have gone down, but because all this oil that used to come to the US is now flooding the global markets, and weighing heavily on Brent prices. 
Cushing Oklahoma Inventories
For all those who believe that Cushing Oklahoma inventories have dramatically gone down due to the all the pipeline and rail transportation options being developed take a look at the actual data. 
Cushing inventories stand at 46.1 million barrels versus 46.3 million barrels this time last year, and this is after a backwardation market event that creates incentive to liquidate inventories. 
Given that the gasoline demand number last week dropped dramatically, and gasoline supplies are high for this time of year, meaning refining utilization rates will start declining, oil inventories at Cushing will start rising again, and should finish the year at a record above 50 million barrels of oil. 
The other factor worth noting is that since all the oil that used to flow to the US is now stuck overseas, pressuring Brent prices, all the trading capital that used to be in Brent, has now come back to the WTI contract. 
Ergo, part of the reason the spread has collapsed is because oil speculators wanting to match their enthusiasm for stock prices, do it through WTI and not Brent Futures. 
These fund flows wanting to match fund flows in equities have resulted in considerable pressure on the spread, and have moved contrary to the actual inventories at Cushing, which are as high as last year when the Brent-WTI Spread was $25. 
This debunks the oil analysts that state the reason for the spread collapsing is that the ‘land-locked’ Cushing Oil is no longer stuck in Cushing and thus available for the global oil price. Without an active oil export market, and given the amount of global oil that has nowhere to go, i.e., stuck overseas Cushing Oil is as ‘land locked’ as ever.
Total US Oil Inventories
Although total US oil inventories have been reduced the last three weeks by some 26 million barrels, inventories were coming off of record highs, this is the highest demand time of the year with refining utilization rates at their highest, and the market was in backwardation. 
It should be noted that inventories are still extremely high, and the upward trend of increasing inventories started in 2004 is definitely still in place, with each year ending in higher oil being stored than the previous year.
As the summer driving season peaks, and refinery rates start going back into the 80`s, products being well supplied, expect these total inventory numbers to start building again. 
Domestic Production
This brings us to the biggest change in the oil market for the last 20 years, the incredible rise of US production. The US could possibly hit the 8 million barrels per day number faster than analysts thought, maybe as soon as the first quarter of 2014. 
Where Does International Oil Go?
The optimistic oil crowd will point to global markets, that global demand will fill the gap regarding increased oil available internationally due to the substantial reduction in US imports. 
But as many commodity analysts have properly assessed the commodity bull cycle is over, mainly fueled by China which was basically building a new city every month at its zenith of a residential relocation and industrial growth phase. 
This Rural to Industrial Transformation Era in China is complete. China now has infrastructure capacity limits like pollution, congestion, over-population, over-building, debt concerns, property bubbles, and entering a more mature growth phase where quality not quantity takes primal importance. 
We can see this in all the other commodity prices like iron-ore, copper, steel, etc. that China is longer going to be able to single handedly prop up commodities like it has for the last 15 years.
It is obvious that oil is going to be much cheaper in the future, and this is even with multiple OPEC production cuts, there just is too much oil being produced versus the oil being consumed each day. 
Eventually the current trend of building more storage to neutralize too much supply reaches its limits and prices come down until demand outpaces supply. 
The EIA doesn`t expect this in 2014, and has reported that supply will continue to outpace demand for the next two years.  
The world can only build so much storage to store extra supply; at some point demand has to eat up this extra supply. Prices have to come down significantly to help improve the demand side of the equation. This is simple economics 101 folks!

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Ban Goldman Sachs from Playing in Commodities

July 21, 2013 by EconMatters   Comments (0)

By EconMatters

Federal Reserve Review
On Friday Reuters reported that the Federal Reserve is going to review the 2003 decision that allowed regulated banks to trade in physical commodity markets: “The one-sentence statement suggests the Fed is taking a much deeper, wide-ranging look at how banks operate in commodity markets than previously believed, amid intensifying scrutiny of everything from electricity trading to metals warehouses.” Reuters goes on to say, “While the Fed has been debating for years whether to allow banks including Morgan Stanley (MS.N) and JPMorgan (JPM.N) to continue owning assets like oil storage tanks or power plants, Friday's surprise statement suggests it is also reconsidering whether all bank holding firms should be able to trade raw materials such as gasoline tankers and coffee beans.” 

Big Banks & Unintended Consequences of Fed Policy

The Fed is finally getting that the Big Banks are canceling out any intended good that may accrue to wealth creation by pushing up stock prices, if at the same time these same financial institutions also push up commodities like oil, gasoline, copper, heating oil, wheat, corn, and soybeans with the same cheap QE stimulus money.
The fed is trying to weed out some of the unintended consequences of their QE stimulus program. Because on one hand they are trying to stimulate the “Wealth Effect” with higher stock prices, but these bankers have so much cheap capital available to them, and with the fed mandate to boost asset prices, they cannot help but juice up commodities at the same time. 
This leads to adding a huge tax drag on small business, consumers and the overall economy with commodity prices trading well above the fundamentals of a sluggish global economy, and a domestic US economy treading water at an anemic 1.8%.
The fed is finally realizing that they should be getting much more bang from their monetary stimulus efforts, and the added economic costs of over-inflated commodity prices just negates any positives of their stimulus programs.
Where have the Regulators been?
But it is a shame that it takes the Fed to finally clamp down on the banks in this area as regulators should have banned these firms for trading commodities after the oil run-up of 2007 when banks pushed oil to $150 a barrel. 
The patterns of banks manipulating markets are so numerous and widespread in financial market history that there is no way regulators should have let them anywhere near economic sensitive staples for consumers like Wheat, Soybeans, Oil and Gasoline. Furthermore, if the regulators did any investigating at all they would find much more abusive market manipulation practices than Libor Rate Rigging.
Is there a market the Big Banks haven`t tried to Manipulate?
Name me one market these banks haven`t tried to manipulate or Rig? Whether it is the recent settlements or future settlements in the Power Industry or the many manipulative practices discussed regarding “Metals Warehousing” to outright manipulation of key commodities by artificially taking supply off the market which has happened many times in the history of the oil markets. 
The point is these firms cannot be trusted, their past behavior in anything market related from CDS, MBS to levering up their balance sheets by 40 to 1 ratios, should serve as a warning to any critical regulative body that it is a bad idea to let them “play” around in any essential commodity that consumers rely on for daily living purposes.
Congress initiated the Fed Review
It is about time that Congress started doing their jobs and initiated this inquiry by the Federal Reserve. The bigger question is why did it take 5 years after the financial crisis to realize these banks are bad market participants? 
The Oil Market is the most Manipulated Market in the World
Just look at Oil prices above $80 a barrel when the Global economy was in a full blown recession. You actually think Oil prices were there because of the fundamentals of supply and demand in the market? Please, the United States was importing 5 Billion barrels of oil a year in 2006, and now we are importing 3 and a half Billion barrels of oil in 2013, and prices are 40% higher with China`s economy at stall speed?

 Banning the Banks brings back the Fundamentals into the Oil Market
This is an amazing reduction in imports of 1.5 Billion and prices are 40% higher with increased Global production. Consumers, Regulators, and Businesses have no clue how Big Banks have totally changed the pricing of everyday commodities like Oil and Gasoline once they started trading these markets electronically, and utilizing their other manipulative strategies to game these markets! 

40 to 1 Leverage is never good for Markets

Excuse my French here, but Get these “Regulated” Banks out of Essential Commodities, and never let them back in! It is about Freaking Time, and it really took ‘Regulators’ that long to realize that banks trading gasoline was never going to be good for consumers and the economy? Where do you think that 40 to 1 leverage goes? The recent 20% gain in gasoline prices in a month in an over-supplied market is where that leverage goes!

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President Obama Could Give Mainstream a Bailout with SPR Release

July 20, 2013 by EconMatters   Comments (0)

By EconMatters

QE Fueled Market Mania
It was another crazy day of speculation in the gasoline and oil markets, typical of the QE fueled shenanigans that happen every day for the last month in equities and oil.  Speculators ran WTI up to $109 a barrel, and the RBOB contract up as high as $3.16 a gallon on Friday. So expect prices at the pump to continue to rise due to wild, rampant speculation in the futures market. 


The Middle Class & Rising Gas Prices
Unfortunately, the wealthy futures traders can afford these higher prices, but the middle class portion of the population really gets hurt by a 50 cent per gallon price increase at the pump. Think in terms of college students working to juggle rising tuition costs, with already tight budgets, and now they have to use credit cards to pay for their increasing gas bills each week because their low paying job doesn`t completely account for $4 a gallon gas fill-ups each week.
The Wal-Mart Economy
Think in terms of the average Wal-Mart shopper who barely makes it through the month on a strict budget, and is as price sensitive as any consumer in the country. This is why they are shopping at Wal-Mart because every single percent savings goes a long way in meeting their basic needs and having some semblance of a high quality of life given their limited resources.
Long-haul Truckers
Think in terms of a long haul trucker, who is independent and even though there are fuel subsidies, ask any trucker, and they will tell you that for the most part these fuel-surcharges are inadequate to mitigate against these types of rise in fuel costs. There are times where fuel prices are too high with these types of increases that certain trucking runs are unprofitable. They simply cannot take certain loads. Even at times they take losses on routes, to keep the business, and hope that prices will drop in the future. But these price increases in fuel categorically negatively affect their profitability, and thus livelihood. 
Everybody but “Middle Class” gets a Subsidy
In this country we bail out banks, we give subsidies to the large oil companies, we give subsidies to large corporate farming conglomerates, and we give energy subsidies for alternative energy business development like wind and solar projects. So we seem to subsidize a lot of big business in this country with low effective tax rates, offshore loopholes, and low minimum wage requirements. 
There is a reason ZIP Codes Required at Gas Stations
But how are these same minimum wagers supposed to pay for gasoline each month without their own form of bailout? This is part of the problem, and why when you go to pay for gasoline at the pump, the machine asks for modern security features like a ZIP code, because gasoline has become more expensive in this country than many people can afford to pay in low income groups.
Accordingly this resulted in maxing out credit cards, and stealing credit cards to pay for gasoline purchases. You could track the modern era of energy trading directly with increased security features at the pump. Gasoline is just too expensive relative to the middle class`s income when factored on a percentage basis into a monthly budget.
How High until You ‘Feel’ Average American`s pain at the Pump Mr. President
Thus how about a bailout for the working poor, the middle-class, and all the retired people on fixed incomes Mr. President? Why not a bailout for mainstream Americans? How high do prices at the pump have to go before this issue gets your attention? 
Speculators react to Incentives, the Fed Incentivizes Speculation
Without intervention as we have seen in the past the speculators will push any market as far as they can, and when you have one form of governmental market intervention in the Federal Reserve providing all types of cheap liquidity from low interest rates, $85 Billion in stimulus each month the speculators are encouraged and even need places to invest this money. Again another bailout for people who are the least in need of a bailout is the big banks and the Speculators who caused the entire financial crisis in the first place! 
Democratic Constituency
So how about helping a large portion of the people who actually voted for your two terms in office? Is it that you have no more elections to run, that you have turned your back on the middle class in this country? Mr. President, Do you care about high gas prices anymore, or have you sold out to the corporate interests? 
Obama was going to Protect America from the Evil Speculators
Wasn`t the middle class, and protecting mainstream`s interests from the Greedy, Corrupt, Evil, Too-Big-to-Fail Banks a large part of your political platform when you were elected eight years ago? You have utilized the SPR card twice to curb the speculators, and it worked both times like a charm. Give mainstream America a break with a bailout for their pocketbooks for a change, and release the Strategic Petroleum Reserves. 
What is different now? Election, Election, Election
To quote directly from the last time Obama released the SPRs: “The overriding purpose of our effort is to increase supply to counter any shortfall and meet this typical increase in oil demand over the summer.  We are heading into a period in which demand for oil tends to be at its highest,” a senior administration official explained.” How is this summer any different Mr. President? Or now that you do not have any more elections to win, you don`t give a damn about the middle-class, the elderly, and mainstream America?
Leadership, Leadership, Leadership – O Brother, Where Art Thou?
I guess you’re just the typical limousine liberal who invites Billionaire Tech Titans to have dinner in Washington; the ‘beautiful people’ while the rest of mainstream America struggles to pay gasoline prices that they cannot afford, when a little presidential leadership on your behalf could improve their situation substantially. I reiterate Mr. President, we bail everybody else out in this country, why not middle-class Americans via an SPR Release to counter high prices at the pump?

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Earning`s Season is starting to look like a Disaster

July 18, 2013 by EconMatters   Comments (0)

By EconMatters

Earning`s season is starting to ramp up, and its abundantly clear that we have a problem. We had this occur last year as we were pushing all-time highs in markets, and the bulls wouldn`t let stocks drop even as a couple of misses started happening. Then on a Friday before option`s expiration, all hell broke loose because there were so many misses and stocks getting killed that the carnage was too much to fight, and the bulls capitulated. 


This earning`s season is much worse as almost every single company is missing on the revenue side, companies haven`t figured away to manipulate this portion of earnings as easily as the EPS number via stock buybacks. But things are so bad major equity bellwethers like Goggle, Microsoft, and Intel are just plain missing by any quarterly metric. 
The bulls will try to counter this weakness by pushing up other stocks, but this can only last so long after about 30 misses, and the entire market just falls off a cliff because there are so many shorts attacking individual earning`s misses on stocks, that the cumulative effect overwhelms even the most optimistic of bulls.
By my count we have about 10 misses this far into earning`s season, only 20 more to go before the real selling takes over in markets! Earning`s season used to be good for stock prices, and it is because so many firms need to manipulate their EPS number, that they are all busy bees buying up shares to beat their awful EPS target number by one cent at all costs. They know where they stand after the quarter, now they start buying back shares like crazy to meet this EPS target. What a scam, and it is completely legal.
But the problem with earning`s season with stock prices at all-time highs is that anybody in one of these stocks that has an earning`s miss loses a lot of money real quick. So earning`s season now more than anything resembles a flashlight in a dark room at night, as all the bull cockroaches flee for cover. It acts as a massive dose of reality for the overzealous bulls who wrongly figured that stocks cannot fall in a QE injected market.
Well not only can they fall, the bulls may very well have bought at the top of the QE market this week as tapering starts in September. The market probably drops like a rock after an additional 20 earning`s misses in the next few weeks. And given that it often takes 13 days of aggressive selling to get out of positions by firms, do you think everybody is going to wait until September to actually start unwinding their exceptionally levered positions? 
Don`t everybody run for the exits at the same time folks. Remember to walk, and not run! Just imagine the carnage on the way down as everyone starts selling their 13 days’ worth of positions at the same time. You literally can just close your eyes and hit the sell button. 
Once the ETFs kick in this is going to be one of the most “unsteady” portfolio rebalancing events that we have experienced in recent time with asset prices so far ahead of ‘reasonable valuations’ things are going to get extremely ugly, real fast! 
What is that old market adage, stocks take the escalator up, and the freight elevator down. Well, the problem is that not everybody wanting to sell this time will be able to fit in the elevator, so there will be crushed bulls piling on top of the elevator trying to liquidate positions, and unfortunate, slow-witted bulls hoping for more fed buying to save their ever-decreasing portfolios a la David Einhorn with his Apple stake! He rode that baby all the way down $300 a share. These bubbles always end the same way! 
Thank you Ben Bernanke when all is said and done you are going to be remembered as the worst Fed President of all time! The man who created the largest asset bubble in the history of markets, and left the fallout of the flawed policy for somebody else to fix! This is no different than Angelo Mozilo of Countrywide, that`s a nice legacy Ben. I hope you are proud of yourself!

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Gasoline Supplies Highest for July Period Since 1992

July 18, 2013 by EconMatters   Comments (0)

By EconMatters

Refiners actually try to keep low inventories to have illusion of ‘tighter’ markets
Gasoline supplies had a substantial build in inventories, up 3.1 million barrels, and looking back at the EIA data, July is in the heart of the summer driving season, and refineries run at their highest utilization rates. Well, there has never been a period in July where inventories are as high in gasoline supplies as currently exists in recent energy statistics. We have to go all the back to 1992 to find supplies for the July period higher than they are right now, and it isn`t by much.


Oil Market Propaganda
It is funny all the propaganda that consumers get fed as to why they pay so much at the pump, it is all total hogwash. The oil market is one of the most rigged markets that actually have fundamental uses for the product. Stocks are rigged in many ways, earning`s reports are gamed via stock buybacks to beat on the EPS, but these companies are really missing bad if you look at the revenue misses. Mind you, revenue targets are set so low that these companies cannot possibly miss, yet companies have been missing consistently for the past couple of years. 
Expect Higher Gasoline Inventories Next Week!
But there isn`t a fundamental market use for stocks like a commodity which has consumers who buy a product to get to work each day. One where it makes sense for example if supplies are high, i.e., not a tight market, that prices should come down to lower supplies and sell more product. This is what happens in a fair market which is not rigged. Consumers should be infuriated that they are paying some of the highest prices for gasoline when oil supplies are very high, domestic oil production is at 20 year highs, and gasoline inventories are higher for this time of year than any time in the last 22 years!
Congress is Investigating the wrong Culprits
Talk about getting ripped off! It was interesting that Congress`s response was to bring the refiners into recent hearings to discuss why prices jumped so much lately. I imagine refiners getting screwed by the collapse in the WTI-Brent spread, probably are going into futures markets and pushing up product prices to help their margins since they can no longer count on a $25 dollar spread to fatten their margins. So they are to blame I am sure to some extent, but Congress needs to focus on the Banks and Hedge Funds, they are the real culprits for outrageous prices here.
J.P. Morgan`s Trading Group Started this Volatility Trading Rally
It all started with J.P. Morgan`s call that they believe commodities have gone down far enough and that they should be bought. This was the start of the move up in oil, and thus product prices. You can rest assured that they have profited nicely on this move. So Congress needs to bring the investment banks that specialize in running up these energy prices, and they will see a pattern of abuse the last five years. These same firms make their public research calls, after they are properly positioned, and then strategically push up prices as high as they can. 
Trucking, Airlines, Retail, Restaurants all Pay for J.P. Morgan`s Energy Trading Profits 
This usually ends in dramatic drops in demand because prices are too high for consumers and the economy starts decelerating. And why shouldn`t it? Think in terms of the trucking industry that has to use fuel to transport all kinds of goods across this country; their operating costs just went up 15% in a month! The other way this ends is the president threatens an SPR release, I know kind of stupid with record levels of supplies. But the speculators run out of the market like rats in a flood of selling. The other way speculators get out of this bullish run-up is equities or other assets get sold off, and given that oil is more tied to equities than the actual consumers, it gets sold off with equities. 
The Investment Banks artificially create “Volatility” in the Oil Markets
So forget about the refiners Congress, the investment banks are the ones that you need to bring in front of congress! Subpoena their trading records for the last five years and the patterns of manipulation will emerge rather clearly. This run-up like all the others is for trading profits. There never are real supply issues in the oil market. 
WTI $12 Higher Than EIA Average Price for the Commodity
The EIA has an average price for oil at around $94 a barrel for the year. Oil could basically trade at $94 a barrel 365 days a year give or take a dollar or two. But these investment banks like Goldman Sachs, Morgan Stanley, Barclays, and J.P. Morgan cannot make any money with a steady, stable market. 
These firms need to “manufacture” supply shortage scenarios to create volatility in the energy markets so they can make money. 
Mark my word, these same firms will be talking about how gasoline supplies are heavy for this time of the year in a couple weeks when they push oil back down to $90 a barrel. This happens 7 or 8 times a year for the last 5 years. It is all a “volatility trading scam” to make money! 
This is what Congress should be investigating, and not a bunch of refiners trying to make a little margin. Get your act together, and bring in J.P. Morgan and Goldman Sachs these are the real reason consumers are getting screwed at the pumps once again!
If I-Banks Love Energy so much, Make them Take Physical Delivery!
I repeat gasoline supplies for this time of year are higher than at any time in the last 20 years, and it isn`t even close. Moreover, there are plenty of oil inventories, well above historical levels, if refiners need any more gasoline. 
So why in the heck are consumers paying record prices right now? This is the definition of a “Rigged Market”, and these are the questions that Congress needs to be asking these banks.
The alternative which is what I favor to get right down to the crux of the issue would be to overnight make everyone holding a futures position in every energy market take delivery of the contract! 
Short of this I would threaten release of the SPRs to make the speculators pay for trying to push/rig a market for the creation of “volatility trading profits”! It is hard to have a losing day trading for a quarter when Congress is busy interviewing refiners, while the I-Banks can move Oil up and down $15 dollars many times a year without any consequences from Congress!

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Oil API Numbers Bearish for Wednesday`s EIA Report

July 17, 2013 by EconMatters   Comments (0)

By EconMatters

The API report shows that US Crude stockpiles shrank 2.6 million barrels last week, which is bearish given that the oil market is in backwardation, and many analysts expected many sellers would take advantage of unusually high prices, and sell any oil they could out of inventory. 


The real bearish part comes in the product numbers given the insane run-up in product prices. Gasoline stockpiles rose 2.6 million barrels last week, so much for that vaunted fuel shortage. Analysts were expecting a drawdown in supplies around 1.5 million barrels in the EIA report.
It gets even more bearish as we go through the inventory numbers as Distillates increased 3.8 million barrels which includes heating oil and diesel. Inventories for Distillates were expected to climb approximately 1.5 million barrels in the EIA report.
Again given the run-up in prices expect some cold water of reality smacking the bulls back into their corrals. There is no supply shortage, there never was a supply shortage, and in fact, there is an overabundance of supplies. 

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Oil's Middle East Fallacy

July 17, 2013 by EconMatters   Comments (0)

By EconMatters

Egypt: It`s Jobs Stupid…..

A couple of weeks ago Egypt demonstrations led to the Mursi administration being removed from office, who was elected from the last set of demonstrations. What Mursi and many media analysts failed to realize is that the demonstrations weren`t really about democracy, religion, philosophy or ideology but were actually about jobs.

It’s the economy stupid, that is what the Egyptian people really care about, which is ironic because without a major overhaul in their country`s entire business structure, the one strategic advantage the country has is the tourist industry.

The tourist industry brings in revenue, and supports many types of jobs all throughout the Egyptian supply chain. The irony is that the prolonged demonstrations, and cases of violence reported only hurt the tourism trade even further.
This is something the military has understood, and why they are taking measures to stop the demonstrations, and get back to normal as soon as possible in being an attractive destination for tourists once again.
It will take twenty years to reform Egypt for example to focus on an alternative industry like technology, and being a technology hub in the Middle East. And even if that was a goal to produce jobs in the country they need money to transition from a tourist based economy to one that provided opportunities for their young people.
This is only going to come from one place, the tourist industry so the government needs to eliminate the demonstrations at all costs, attract tourists once again, and get people back to work. Why do you think there were so many people demonstrating? It is because they didn`t have jobs to keep them busy and fruitfully employed.
The military and temporary government realizes that the most important thing is the economy, get people some jobs, and they are much happier. It isn`t about governmental corruption, all governments are powerful and corrupt. It`s the economies that don`t provide business opportunities and jobs that make citizens unhappy and unruly.
Why the Middle East Supply Shortage Argument is Vacuous
Point #1

This brings me to the recent spike in oil on the Middle East demonstrations which have happened every year for the last four years. There is always some reason in the Middle East why oil has to spike higher by $5, 10, 15 dollars a barrel.
Whether it is Israel bombing a few weapons caravans, Egypt demonstrations, Syria civil war, Libyan insurgents attacking Embassy personnel, etc. But this is all noise, and completely irrelevant to the supply of oil in the marketplace.
When was the last time in 30 years where the world actually had a supply disruption from the Middle East? Never, the reason why and the Fed president James Bullard put it quite well the last time oil spiked on middle east nonsense is that whoever is in power, needs money, and oil is the one commodity that these countries have to get money.
I don`t care if a bunch of mercenaries took over power in some oil rich country, you can bet they are going to be selling oil to support the need for money. People in power will protect the oil infrastructure at all costs, because it gets them money which controls their livelihood.
If there is a powerful overthrow of a previous regime, the conquering power will then protect the oil fields so that they can then stay in power through the money generated from the oil resources. This is why you will never have a major supply shortage in the oil industry from Middle East flair ups.
Point #2

Here is the adjacent point that makes this even more salient, if let`s say something crazy happened like the Saudi oil fields were attacked and damaged, and some crazy group started burning the oil fields. Yeah, that is how far-fetched an event would actually have to happen to actually have a major supply shortage from the Middle East.
This is just a hypothetical because one call to the US would bring in all hell, and the oil fields would be protected by US troops. But let us assume that this event did happen. Well oil prices would immediately spike, but the conundrum is that prices would be so high due to speculators, that nobody on a wide scale could afford any oil, and the entire global economy would come crashing down into a depression, and then you couldn`t give the stuff away because of the damage of the depression to the world`s economies.
Further Reading: The Bernanke Conundrum 
You wouldn`t need middle east oil at all, because there would be more than enough supplies in the rest of the world for what is left of the global economy. Most people just fail to understand this point. Oil is only valuable in the current scale of supplies at a certain price point once it goes too high it destroys the very demand that is necessary for its wide spread adoption as an everyday staple by consumers.
Above certain price points the majority of people simply cannot afford it, so then it has no demand on a large scale. Thus the global economy implodes, and no need for gas anymore because nobody has jobs in a global recession.
This is the Yin and Yang of the oil industry which 99% of business people fail to realize about the commodity. The scale of the oil market ultimately limits its upside in price, and it is only valuable if there is a vibrant market for its use.
Too high prices by a catastrophic Middle East real supply shortage actually spell the death of the demand for the very commodity that at first spikes because of said event. It is the ultimate paradoxical rationale for why any real supply shortage in the Middle East is actually meaningless for the price of oil.

Under both scenarios the price of oil will ultimately be lower. This is the major misunderstanding of the oil market, and historically during the first Iraq war people made a fortune, shorting the spike in oil prices.
Oil only remains valuable given the scale of the market, if there actually is a large, thus scalable market in place to provide consumers for the wide spread production of the commodity.
High Gasoline Prices Just Killed the Summer Driving Season!

You see this phenomenon played out on a small scale here in the US each of the last four years. Every time gasoline prices spike, after a few weeks demand for the commodity starts dropping, and then prices start coming back down.
Moreover, this is in the wealthiest country in the world. Just imagine what happens in China, India or parts of the third world on any type of price spikes.
This is why with plenty of supplies, the summer driving season was actually starting to experience a slight pickup in demand because gasoline prices were lower than they had been for a while, and sure enough the prices spike, and we have killed another summer driving season with high prices.
Mark my word; we have already seen the peak demand for the summer driving season. It is all downhill from here due to the pullback from the incredible spike in gasoline prices.
In a couple of weeks, wholesalers will not be able to give the stuff away as demand craters for the remainder of the summer driving season. They will be stuck with all of this inventory that will be decreasing in prices.

The old adage always applies with regard to oil and gasoline prices “there is no cure for high prices, like high prices.” This is why the Middle East can never truly have a prolonged supply shortage. They will price their customers out of the market!

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Even Oil Executives Know Oil Prices are Too High!

July 16, 2013 by EconMatters   Comments (0)

By EconMatters

WTI is Tracking S&P 500 last Month

It is obvious that the oil market is out of touch with the fundamentals of a sluggish global macro-economic picture, and surging domestic and international oil production right now. The problem is that Oil, and especially WTI which is being tied to the S&P 500 bullishness, (i.e., stock market at all-time highs) is completely manipulated by hedge funds and investment banks and is harmful to the economy, businesses and consumers.
Chart Source: FT.com
Oil Industry Analysis

But this is just my analysis, let`s hear what Oil industry executives believe: Gulf Oil CEO Joe Petrowski stated that Oil prices should be about half of today's $105 a barrel price by the end of the year. He stated the reason for this price analysis is because of increasing supplies as there are record amounts of oil and natural gas that are being produced in the United States and in Canada and OPEC supplies are higher.

Oil at $50 By End of Year: Expert
Joe Petrowski, CEO of Gulf Oil, explains why he sees oil headed much lower. (Video Source: CNBC, July 15, 2013))

What is wrong with this picture?

So we have an economy growing at 1.8% by the official GDP numbers, China just printed their lowest GDP number in five years, and Greece needs additional bailout money from the IMF. What is wrong with this picture?

The same thing that has been wrong with this picture for the last five years! It is about time government, regulators or the American people themselves say enough is enough and do something about this outright theft, i.e., stealing from businesses and consumers.
To artificially raise an everyday staple like oil and derivatively gasoline for citizens worldwide when there are ample supplies, more than ample, an over-abundance of supplies is more than criminal it is immoral in a civilized society. I am all for a fair price being set by the actual market forces but we don`t have that in the oil markets.

Speculators, Speculators, Speculators…

The oil market is a paper/electronic market which is manipulated by a few powerful elite investment banks and hedge funds that distort prices in the actual physical oil and gasoline markets.
For example, “Money managers boosted their bets on higher oil prices to the highest level in more than two years during the week ended Tuesday, according to government data”. As in, ‘Hedge funds and other speculators held a net long position of 281,918 contracts during the week ended Tuesday, the Commodity Futures Trading Commission said Friday. That is a rise of 6.9% over the prior week and the biggest net long position since March 22, 2011” as reported by the Wall Street Journal.

Who Protects Consumers from these Predatory Practices?

This has happened probably 20 times during the last five years, where the speculators drive up prices not because of fundamentals, or real supply shortages, but because they can.
The government wouldn`t let them rob banks with this kind of impunity. The Fed is so concerned with banks ripping off consumers with aggressive credit card fees and banking fees, how is this any different? This is a prime example of investment banks and hedge funds taking advantage of consumers and businesses with predatory practices.

Political Representation has Over-riding Interests versus Consumers

It is impractical for consumers who have jobs to take time off and protest against this crap, voting doesn`t work because if you look at all the largest campaign donation lists you find the likes of J.P. Morgan, Citi, Morgan Stanley, Goldman Sachs. Talk about the fox guarding the hen house!

The Oil companies realize prices don`t match the fundamentals, even the Saudi`s on several occasions have called out the speculators, but they still benefit as a result of maintaining the status quo. The only time there is governmental intervention, is when President Obama worried about getting elected. So this seems like a “self-interest” problem.
How do the majority who use the product get the market price instead of the “Hedge-Fund & I-Bank” mandated price in the marketplace? Going through proper local representation in Congress seems fruitless as they are more concerned with getting further donations to win the next election from the very same investment bank that is artificially gaming the market.
Would a national gasoline boycott day get the media`s attention, and thus politician`s ear? Maybe but that requires an organized movement, impractical participation, a motivated leader and seems hard to pull off in a society the size of the United States.
It is a shame because isn`t this what our political representatives and market regulators are supposed to be doing all along anyway? Isn`t this the actual service they are supposed to be performing?
We should just have an election every year, and then the politicians would be more worried about getting elected versus taking donations from I-Banks and would threaten release of the SPRs a la Obama on an annual basis as opposed to every four years.

The Big-Pullback that Oil Companies & OPEC Fears

I think what inevitably will happen, and what insiders are preparing for in large Oil companies because they know that the fundamentals versus supplies don`t match, and they also know that they are producing far more oil than they should because of artificially high prices, that there will be a major pullback in prices whether I-Banks and Hedge Funds like it or not.

All the market Intel departments of the Oil majors have researched and forecast the pullback period for budgetary and business development purposes. They just cannot precisely say when it will happen, but they all expect it to come given the fundamentals in their industry. Ask anybody who works at one of the Oil majors if their research doesn`t forecast this scenario!

It seems Consumers & Businesses are Powerless in this scenario

It is a shame that consumers are so powerless, have no real representation on this issue, and excuse my French, but have to put up with this crap!

Markets have become ‘Characterizations’ of Free-Market Ideals

It must be some twisted irony that the country that promotes free and equal markets has bots stealing pennies from every transaction, legal front-running via co-location and subscription data access, and energy prices standard deviations above real market forced value. All the while I-Banks routinely never have a losing trading day in a quarter.

It is pretty bad when even oil execs start shaking their heads. The Party who buys the most futures positions has all the power, and can push prices wherever they want until somebody puts their foot down and stops this nonsense!

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1% Growth: QE Policy a Failure, Time for A Change

July 16, 2013 by EconMatters   Comments (0)

By EconMatters


Fed Policy – Pushing on a string: Is far too Kind

Economists are now ratcheting down their forecasts for final 2nd quarter GDP to 1% which just further illustrates the ineffectiveness of fed policy measures. Ben Bernanke blames fiscal policies out of Washington, saying he can only do so much to counteract their lack of a healthy tax code, job creation plans, and inefficiencies. 
However, it is starting to look more and more like Fed policy, a lack of creative fed policy, or even too much fed policy is equally to blame for the non-recovery five full years after the financial crisis. 
Dallas Fed President Richard Fisher talked about pushing on a string, and it looks more and more that the fed is actually doing more harm than good to the economy with their programs.
Pushing on a string implies that they just aren`t getting the desired results from their programs, but that they definitely are not having negative effects on the economy. But the Fed is actually damaging the economy through policy measures in several ways.
Low Interest Rates Hurts many Segments of the Economy: Savers

For example, just in my limited sphere of contacts on a daily basis over the last four years I have met many people who rely on CDs for their income; this is their only major source of income. They are unemployed, their spouse has died, and the deceased husband left enough money in a CD program with a paid off mortgage for the wife to pay her monthly living expenses.
The Stock market is great for younger, more risk taking investors, but for many baby boomers and others not wanting to take chances on the market given its volatility CDs with higher interest rates serve a valuable need in the economy for protection of capital, with a slight return to supplement their income.
This entire market niche has been hurt and destroyed by the fed policy of keeping low rates for such an extended period of time.
A high saving`s rate has many benefits for the economy. For one, it means the health of people’s finances is in much better position to handle unexpected life events. Often the government has to fill in the gaps when citizens fall upon hard times because their savings rate was inadequate.
This is an inefficient model, which leads to higher governmental debt, higher costs, and higher taxes which provides a major economic headwind for future growth.
The Stock Market isn`t the Economy

Another way in which low rates hurt the economy is that companies are incentivized to buy back stock with these low interest rates instead of using the money to put towards business investment which will lead to more hiring.
This improves the economy because the derivative benefits of higher employment feeds on itself, and more add-on jobs are created to account for more spending in the economy by those members of society who now have disposable income to buy goods and services.
I worked in major fortune 500 companies, and I can tell you from firsthand experience, the executive team who are the ones who make all the business decisions, mainly care about hitting their earning`s expectations so they don`t get fired. Furthermore, making sure their stock price goes up so they don`t get fired and collect with all their executive peers the hefty stock options that become vested in their compensation plans.
The stock buybacks accomplish those two goals far better than growing the business through planned business development. Ergo, extremely low interest rates where borrowing money at exceptionally low rates serves as a major enabler of the status quo and proves as a dis-incentive for taking risks, growing the business through creative means, and hiring new employees. It is highly ironic because these are the desired outcomes that the Fed talks up in their policy philosophy.
This is a major reason why corporate earnings are so much better than the actual economy for the last 5 years. The fed might want to look a little deeper into the harm this has caused for economic growth the last five years. A major QE policy failure in my opinion.
Gasoline & Oil Prices much higher than Fundamentals = Major Tax on Growth

The price of oil and gasoline has been much higher than theyshould have for the last five years because of QE policies.
In fact, Oil and gasoline priced much closer to the fundamentals would have served as a major stimulus to consumers who would have much more disposable income to infuse into the economy over the last five years.
Instead all this money goes towards filling up the tank, and even limits mobility as high gas prices, limit travel, leisure opportunities, and even business profits which could be used for re-investment, and hiring additional workers.
It is obvious that Oil and thus gasoline would have beenmuch lower over the last five years without QE Liquidity used to artificially inflate many asset prices.
The amount of money that is wasted on higher energy prices, and the knock on effects that high energy prices have on business growth and investment models served as a major drag on the economy over the last five years and is a major policy failure.
America needs to Rethink the Makeup of the Federal Reserve: Too Much Group Think

This is much worse than merely pushing on a string Mr. Fisher, this is outright fed incompetence. The incompetence is that the fed continues the same policy initiatives even after it fails to get the desired results they were seeking at the outset of the programs. That is why they continue additional QE programs.
But what did Albert Einstein say regarding insanity and continuing to do the same thing over and over again, and expecting different results? You would think that after the policy didn`t meet their objectives, that they would try something different! I think this is where we need more diversity in the Fed governors.
We have too many members of the same ilk, same type of academics, no market experience, no business experience, no minorities, when was the last time an African American was on the Fed, or an Asian American, a Latin American, etc. How about cross-discipline smart people on the board of governors?
But the failure, and continued adherence to a limited scope of fed tools to try and invigorate this economy given substandard results screams out “Group Think” on the Board of Governors at the Federal Reserve.
Inaction is sometimes the best policy: Let the natural business cycle work

It is obvious that more diversity is needed on the Fed; we need more diverse points of view from an analysis standpoint. Sometimes no policy action is actually a policy tool, I know who would have thought?
It is the same notion behind a divided Congress; that they will become gridlocked, and thus cannot pass a bunch of costly legislation that will increase government spending, waste money through inefficient programs, and actually harm the economy.
Well, the same thing applies to Fed inaction; a Fed that did nothing might have actually produced a much better outcome over the last five years. Think of a world where we have low energy costs, higher interest rates, and businesses make decisions based on needing to grow a business by providing value towards consumer needs versus useless stock buybacks.
Fed Policy Needs to Dis-incentivize Stock Buybacks through Higher Interest Rates

Stocks buybacks have nothing to do with Business Development, and businesses investing and spending, and thus hiring is what is required to really grow the economy!
Maybe some middle ground might have even better results like low interest rates for six months, and then slowly start raising the Fed Funds Rate every four months by 25 basis points would have better overall results.

But it is hard to argue that a Fed that did absolutely nothing could have had less of an economic impact than producing a 1% GDP quarter 5 years out from the recession. It is time for a major Sea-Change in Federal Reserve Policy. Replace the entire team; we need some new minds with new ideas regarding monetary policy. Sometimes it is better to do nothing at all!

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Oil in Tankers to Manipulate Prices?

July 16, 2013 by EconMatters   Comments (0)

By EconMatters

The 20 Million Drawdown in a sluggish economy

The last two weeks oil inventories fell by a record 20 million barrels, this event has never happened in 30 years of historical data. So what the heck is going on here? It is not the case that this is the best economy in the last 30 years. It sure isn`t the case that Americans are using more fuel right now compared with any other time period during the last 30 years.

Peak Demand Era


In fact, the US market is maturing and using less fuel these days for several reasons like alternative energy, higher fuel efficiencies, fuel blending requirements, and a struggling economy with the highest rate of population on food stamps.
Supplies at Record Highs

Sure refiners are running at their highest rate of the year in the 92% range, but that is all normal for this time of the year. Yet this two week drawdown has never happened before, and curiously it happened as supplies were at record highs.
Increase in Domestic Production Matches Reduction in Imports

Something just doesn`t add up here. It appears there is some funny business going on in the oil market once again. What makes the drawdown even more suspicious is that domestic production was very high the last two weeks at 7.2 and 7.4 million barrels per day, with imports down to 7.4 and 7.5.
The imports are low compared to last year at this time which was 8.6 million barrels for the same week a year ago. At first blush that is the reason for the drawdown, just take a million barrels per day times seven days in a week, and it adds up to a 7 million barrel weekly deficit.
But then you compare domestic production to last year and it is up 1 million barrels per day compared to this time last year. So the trend of replacing Saudi oil with Domestic oil continues on its natural course given the recent industry trends.
Where is Saudi and Nigerian Oil Going?

A couple of points worth noting: What is Saudi Arabia doing with their extra capacity now that they are no longer sending this oil to the US? It sure isn`t going to China, it is not like their economy is booming right now. It sure isn`t Europe as they are a mature market with automobile sales at 20 year lows and high unemployment!
I know that there is a bunch of Nigerian Oil just sitting on tankers waiting for buyers because the United States isn`t importing as much of this oil given the higher quality domestic production, but what about Saudi Arabia? What are they doing with the glut of oil that used to go to the US?
The Real Reason Tanker Rates are Rising?

I noticed that tanker rates have been rising; is the real reason they are rising is that a bunch of oil is being taken off the market and stored in ports around the world to artificially raise prices. This wouldn`t be the first time this trading trick has been utilized by big players in the industry! It is not like Saudi Arabia has reduced production in a significant manner to account for where their excess capacity that used to go to the US in now being marketed.
Managing the Market

But the trend is clear if Saudi Arabia was sending the same amount of oil here with the increase in US domestic production currently, oil prices would be much lower. So they are trying to manage prices and the supply glut by trying to offset the increase in US domestic production by exporting less to the US.
For example last June 22, 2012 the US imported 9,118 (million barrels per day) for that week ending period, and the US has imported up to 11,153 (million barrels per day) for a July period as recently as 2010.
The other question is what does Nigeria do with all their extra oil right now? This oil has to hit some market at some point given some degree of reduced market price, right? Nigeria badly needs the revenue, and is it not like they can just put this oil back in the ground.
Further Reading: The Bernanke Conundrum 
Lack of Huge Product Builds

The other interesting oddity about the drawdown is that the product supplies didn`t have huge builds the last two weeks. For example last week distillates had a 3 million build, and gasoline had a 2.6 million drawdown. The prior week both products had moderate drawdowns. The conventional wisdom is that if refiners are ramping up production, they are drawing from crude oil, and building up product`s inventories.
So a 92% refinery utilization rate is normal for this time of year, but it is apparent that given the numbers not all of this oil went towards refining products. So where did it go? That is the big question!
The Math Doesn`t Add Up!

Because if you add up the numbers it just doesn`t equate: Take domestic production for two weeks, add the import numbers for two weeks, add the refinery inputs for two weeks, the refinery outputs for two weeks, and the draws in product inventories for two weeks, there is no way to account for this record breaking two week draw in oil supplies.
A lot of this oil isn`t being captured in the refining supply chain statistics, so the oil went out of storage, the official storage numbers went down, but it wasn`t all processed into products, so where is it being stored?
It is obvious that something is amiss here in the data as the US didn`t suddenly allow for large exporting of oil, not that there would be a market for it anyway under current global conditions! My best guess is that this oil is being moved from the official storage facilities that have reporting responsibilities to other storage facilities of some kind that aren’t captured by the reporting requirements.
Purposeful Manipulation or System Reporting Glitch?

Whether this is for explicit purposes of manipulating the inventory numbers to affect price is another question, or whether this is just a system which has flaws in accounting for oil being moved from one storage facility type to a different kind of storage facility is another possible explanation.
Oil Market is Well-Supplied!

But the main takeaway is that the recent drawdowns don`t reflect any change in supply and demand fundamentals in the market. This is an accounting anomaly whether for purposeful manipulation or system failure of the data.
Further Reading: China GDP To Hit 6.7%
Two Sides to every Transaction: Excepting Fake “Accounting Trades”

Some analysts have been talking about another big drawdown for this week because the market is in backwardation. The rationale is that why would you hold onto oil if you are going to get a lower price next month, so sell all you can now!
Well, what about buyers? Every transaction has two sides: Why would a buyer acquire oil this month when it can be acquired next month at a cheaper price, and in two months it is even cheaper? It is not like there is any shortage of oil right now!
System Constraints on Volumes

If we experience another large draw something funny and potentially illegal is going on in the oil industry because there is no way this oil is being used to manufacture petroleum products. The system just cannot  handle these type of volumes in three weeks without domestic production or oil imports dropping off a cliff which they haven`t!
History of Oil Market Shenanigans

Ergo, oil is either being taken out of storage and stored on tankers to artificially have the appearance of tighter supply markets, and thus influence price, and will be dumped back on the market at a later date; or some other market shenanigan is taking place where this oil isn`t making its way into the refining supply chain.

It wouldn`t be the first time traders found a way to game the system in energy markets. There is a long and storied history of just such behavior from Enron to J.P. Morgan. But something just doesn`t add up right now in the oil market! 


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