Asian country economies have been, with the recent exception of Japan, steady and consistent growth and fuel consuming machines. Japan may reveal that it is back on it feet when this coming Monday they release gross domestic production numbers for Q2.
Japan's GDP data will be an important measure future fuel demand. While economists are expecting a contraction anywhere from 1.4% to 4.7%, any surprise data better than these contraction percentages, will put a bid on liquid energy futures.
Follow up strength or weakness indication from Japan will be given Thursday when they release trade data. Japan grew trade surplus to $900 million in June. If the July numbers continue showing this trade growth, energy futures, particularly heating oil futures, will receive additional support.
Technically energy charts are bearish. $88 provides solid short term resistance for crude. Should this level hold, bears have the opportunity to try to push down to the $70 handle. Should prices continue to fall, end users of gas and diesel will do well to lock in the lower prices, anticipating prices steadily moving higher in 2012.
Saturday, August 13, 2011
Saturday, July 2, 2011
Clubbing Oil Futures With the Strategic Oil Reserve
Frustrated with stubbornly high retail gasoline prices, President Barack Obama announced 60 million barrels of crude supply will be made available through a coordinated release of strategic reserve supply in the United States and Europe. The US contribution is set at 30 million barrels. With daily worldwide crude consumption at 83 million barrels, will this release of additional crude supply affect crude spot or futures pricing?
The immediate knee jerk reaction of the market to this announcement was to sell, pressuring the market down from $94 to $89. At the close of floor trading Friday, crude was back up to $95. Has the market shrugged the increase supply? Yes. However, traders need to be cautious discounting government intervention in the energy markets.
Government interventions in markets be it in currency or energy are normally futile efforts. Short term markets will react to the intervention, but longer term fundamentals eventually return. In and of itself the 60 million barrels of additional crude is a small amount. 23 million less than daily consumption. It was the surpise factor that caused the sell off. The buyers returned when better than expected economic data was released later in the week.
It is doubtful Mr. Obama will go away quietly should crude rise above $100. Expect for more intraventions with more strategic reserve crude gallons released until Libya crude production comes back online. Longer term demand for petroleum products will eventually drive the market. In the short term, longs need to be aware that a club is over their head ready to beat down upward price movements.
The immediate knee jerk reaction of the market to this announcement was to sell, pressuring the market down from $94 to $89. At the close of floor trading Friday, crude was back up to $95. Has the market shrugged the increase supply? Yes. However, traders need to be cautious discounting government intervention in the energy markets.
Government interventions in markets be it in currency or energy are normally futile efforts. Short term markets will react to the intervention, but longer term fundamentals eventually return. In and of itself the 60 million barrels of additional crude is a small amount. 23 million less than daily consumption. It was the surpise factor that caused the sell off. The buyers returned when better than expected economic data was released later in the week.
It is doubtful Mr. Obama will go away quietly should crude rise above $100. Expect for more intraventions with more strategic reserve crude gallons released until Libya crude production comes back online. Longer term demand for petroleum products will eventually drive the market. In the short term, longs need to be aware that a club is over their head ready to beat down upward price movements.
Friday, June 10, 2011
OPEC (Oil's Perpetual Enmity Coalition)
Well that was a big waste of time. I am referring to this week's quarterly OPEC (Oil's Perpetual Enmity Coalition) no decision meeting . None the less, a pivotal meeting in several ways.
This meeting used to be a very easy read simply by knowing the OPEC committee meeting's proposal recommendation held the day before, a crude trader would be reasonably sure of the following day full member OPEC meeting concenses results. Unfortunately with the strong rift between Sunni and Shiite sects within OPEC, committee recommendations are no longer guaranteed of receiving approval. This was the reason OPEC was not able to agree on increasing crude production quotas.
Saudi Arabia, (Sunnis), rightly argued that current crude oil production needs to increase 2 million bbls per day to meet projected demand. Iran, (Shiite), realizing that Saudi's crude is of a higher sulfur and more expensive to refine quality, understands that the world does need more crude but not the kind coming out of Saudi Arabia. They along with other Shiite dominated OPEC countries decided not to agree to the production increase.
Several television business commentators were arguing that this infighting ultimately means OPEC is no longer relevant and has lost its power to control crude production and ultimately crude pricing. On the contrary, OPEC is more relevant than ever and will continue to be so until alternative energy sources begin to compete with crude as a transportation fuel.
Saudi Arabia understands that even if they produce more crude, it is of the quality that refiners do not want. What refiners need is more production of lighter sulfur crude produced by Libya and Nigeria. As long as Libyan production remains off line, there is no country having excess capacity that can fill the demand gap.
Barring the entire global economy sinking deeply into a deep recession, CL futures will remain on its endless bid and higher crude prices should be anticipated.
This meeting used to be a very easy read simply by knowing the OPEC committee meeting's proposal recommendation held the day before, a crude trader would be reasonably sure of the following day full member OPEC meeting concenses results. Unfortunately with the strong rift between Sunni and Shiite sects within OPEC, committee recommendations are no longer guaranteed of receiving approval. This was the reason OPEC was not able to agree on increasing crude production quotas.
Saudi Arabia, (Sunnis), rightly argued that current crude oil production needs to increase 2 million bbls per day to meet projected demand. Iran, (Shiite), realizing that Saudi's crude is of a higher sulfur and more expensive to refine quality, understands that the world does need more crude but not the kind coming out of Saudi Arabia. They along with other Shiite dominated OPEC countries decided not to agree to the production increase.
Several television business commentators were arguing that this infighting ultimately means OPEC is no longer relevant and has lost its power to control crude production and ultimately crude pricing. On the contrary, OPEC is more relevant than ever and will continue to be so until alternative energy sources begin to compete with crude as a transportation fuel.
Saudi Arabia understands that even if they produce more crude, it is of the quality that refiners do not want. What refiners need is more production of lighter sulfur crude produced by Libya and Nigeria. As long as Libyan production remains off line, there is no country having excess capacity that can fill the demand gap.
Barring the entire global economy sinking deeply into a deep recession, CL futures will remain on its endless bid and higher crude prices should be anticipated.
Sunday, May 8, 2011
Where Is the Floor on Crude?
Having come just short of targeted $117 crude price goal with a $114.95 high print, is it time to follow short term swing momentum with the bears? It all depends on where the selling on crude will stop and longer term players deem crude a value buy again.
With the US dollar seeming to put in a floor on strong euro selling due to Greece announcing it is considering leaving the 17 nation European Currency bloc, US unemployment climbing to 9% and June oil futures down nearly 15% for the week, it might seem wise to run with the heard and get heavily shorted energy.
Despite the massive sell off this week, Fund managers remain net long on NYMEX crude futures and options. Whatever, the bottom may be on crude; analyst vary between $92 and $94, the one great fundamental supply issue remains with Libya. With worldwide global recovery continuing, demand for crude will continue to rise. Going into early next year, should Libya's crude remain out of the market, tighter supplies will keep the longer term crude bull market securely in place.
It is possible this year's high in crude has been achieved. However, should Libya's supply remain off the market crude prices will easily surpass this year's current high.
With the US dollar seeming to put in a floor on strong euro selling due to Greece announcing it is considering leaving the 17 nation European Currency bloc, US unemployment climbing to 9% and June oil futures down nearly 15% for the week, it might seem wise to run with the heard and get heavily shorted energy.
Despite the massive sell off this week, Fund managers remain net long on NYMEX crude futures and options. Whatever, the bottom may be on crude; analyst vary between $92 and $94, the one great fundamental supply issue remains with Libya. With worldwide global recovery continuing, demand for crude will continue to rise. Going into early next year, should Libya's crude remain out of the market, tighter supplies will keep the longer term crude bull market securely in place.
It is possible this year's high in crude has been achieved. However, should Libya's supply remain off the market crude prices will easily surpass this year's current high.
Sunday, April 3, 2011
Egyptian/Israeli 1979 Peace Treaty in Jeapordy
The Camp David Accords of 1978 with Israel and Egypt resulted in the signing of the the first ever peace treaty by Israel with another Arab nation. The reason for not having any treaties before this time, despite thirty years of turmoil between Israel and its Arab neighbors, is simple. Arab nations hate Israel and refused to even talk to Israel. It was not until Egyptian President Anwar Sadat was smart enough to look past the hatred and focus on the economic well being of the Middle East, that a peace treaty was finally negotiated and signed on March 26, 1979.
Israel made the far greater sacrifice in giving up the Sinai peninsula where Israel was producing oil from the Sinai oil fields. Especially when factoring in today's price for oil. Prime Minister Menachem Begin was criticized severely even by conservative Israeli's for making this and other concessions to secure peace on Israeli's southern border. Prime Minister Begin understood correctly that not having to worry about having to defend its southern border was well worth the cost of the Israeli Sinai concessions.
Egyptian President Anwar Sadat was considered by other Arab countries, and even some in his own country, as a trader for signing the treaty with Israel and was eventually assassinated two years after signing. Upon Sadat's death all Arab countries voted against honoring the treaty. To its credit, Egypt has stood by the peace treaty.
With the recent overthrow of Egyptian President Hosni Mubarak the world is cheering the rise of a democratic style of government in Egypt. The great concern for future stability in the Middle East will be how does the new Egyptian government view the 1979 peace treaty? If the commitments of the treaty are no longer honored by Egypt, look for many years of instability and rising tensions in the Middle East, with the price of crude rising higher with the inevitable turmoil.
Saturday, March 26, 2011
Geopolitical Risk Premium Supporting Energy Futures
The advance in crude futures slowed a bit this week, but the positively sloping trend is clearly intact. Even Portugal's well publicized financial difficulties failed to trigger a sell off in crude or the euro. Energy markets continue to remain fearful of the potential supply disruptions in the Middle East and possibly even Nigeria pricing in a premium on these global risks.
We now have crude poised above $105. A figure it has not seen since 2008. A pull back below $100 is quite possible. However, strong support will come in at $97, should swing traders be fortunate enough to see this number enter their variable algorithmic formulas.
The high probability trade will be to add to long positions on any pull backs and be prepared to ride the volatility to a $117 take profit target.
We now have crude poised above $105. A figure it has not seen since 2008. A pull back below $100 is quite possible. However, strong support will come in at $97, should swing traders be fortunate enough to see this number enter their variable algorithmic formulas.
The high probability trade will be to add to long positions on any pull backs and be prepared to ride the volatility to a $117 take profit target.
Sunday, March 20, 2011
Backwardated Crude Term Structures Evidence Continued Positivley Sloped Futures Trend
Japan's increased energy import needs along with turmoil in Libya, Bahrain, Saudi Arabia, and Yemen, will continue to support higher crude prices. Crude and products pulled back slightly this week on temporary demand destruction from Japan. The reality is that Japan will have to find ways to make up for the 10% of nuclear energy production destroyed by recent events.
Evidence of continued crude pricing strength can be seen in the term structure of Brent crude futures becoming completely backwardated. Even well supplied WTI crude futures have turned backwardated from December 2011 onward. Stronger evidence on higher crude prices are evident on year spreads for WTI and Brent. One month ago the spread was at a $3.51 contango. On Friday this spread has gone to a $1.95 backwardation.
Backwardated pricing will continue to bring crude out of storage and into the market on stronger demand. When near months on WTI futures follow Brent trend, pricing will become even more supported.
If this was not bad enough news for anyone seeking lower crude and refined product prices, Nigeria is scheduled to hold elections in April. The trend on these elections is for rebel troops to destroy pipelines, squeezing supply of valuable light sweet crude and adding additional upward pricing pressure.
Evidence of continued crude pricing strength can be seen in the term structure of Brent crude futures becoming completely backwardated. Even well supplied WTI crude futures have turned backwardated from December 2011 onward. Stronger evidence on higher crude prices are evident on year spreads for WTI and Brent. One month ago the spread was at a $3.51 contango. On Friday this spread has gone to a $1.95 backwardation.
Backwardated pricing will continue to bring crude out of storage and into the market on stronger demand. When near months on WTI futures follow Brent trend, pricing will become even more supported.
If this was not bad enough news for anyone seeking lower crude and refined product prices, Nigeria is scheduled to hold elections in April. The trend on these elections is for rebel troops to destroy pipelines, squeezing supply of valuable light sweet crude and adding additional upward pricing pressure.
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