Oil bears give thanks and oil bulls get gobbled up as the one-day rally turned out to be a big turkey. Today the bulls hope that oil inventories, or perhaps China's biggest interest rate cut in about a decade, might help turn the oil market around. Overnight the People's Bank of China said it would cut its benchmark lending and deposit rates by a whopping 108 basis points and at the same time cut their bank’s reserve requirement ratio. This comes on top of China’s huge stimulus plan they just recently announced.
The reductions came less than a month after Beijing rolled out a 4 trillion Chinese yuan (CNY) stimulus plan. The rate cuts, which take effect Thursday, were four times the size of recent rate reductions and well above the 54 to 81 basis point cut the market had been expecting. China will cut the one-year CNY lending rate to 5.58% from 6.66%, and the one-year CNY deposit rate to 2.52% from 3.60%.
Despite all the problems in the world economy there is still a lot to give thanks for and we should especially give thanks for oil market speculators. That's right, speculators. You can't live with them and you can't live without them. Earlier this year when oil was on a bullish rampage, government officials and even some misguided analysts were blaming speculation and speculators in the market place for all that was wrong in the economic world. Now that oil has gone bust, some are already yearning for those good old days of wanton speculation. In fact with oil's great fall putting many long-term energy projects on hold some are wondering better ways to keep these long-term production projects going even with the inevitable boom and bust cycles. The answer my friend is not blowing in the wind the answer is encouraging more speculation. That's right more speculation not less.
Most politicians don't get that, but one wise politician seems to understand that the secret to promoting a more stable and profitable global oil market and economy is to encourage more speculation. Dow Jones Newswires reported yesterday that Bank of England(BoE) Governor Mervyn King was saying that there may be a role for governments in oil consuming countries to encourage more liquid oil futures market to reduce the volatility in energy prices. And if you are going to have more liquidity, you are going to need more speculators. But not just speculators in the front end of the market but to create the environment for a liquid market throughout the entire crude oil market curve. King makes a good point as reported by Dow Jones when he says, "From our perspective, the oil futures market more than a short period ahead is really very thin and this does cause a problem because markets can be very effective in guiding resources, but the futures market in oil is too thin to be an effective guide (insert "need more speculators" here.)." King said it's a problem because oil producers need some certainty that prices will stay firm in the long term to make the investment decisions that will increase supply yet this does not exist. He said if producers knew they could sell oil 10 years forward in a liquid market at a decent price, they would be more willing to invest. "I think there is certainly scope for discussing among the major consuming countries how far it's possible to create in some way, with government support, a much deeper and longer futures market."
There are two ways we could do that very easily. The easiest would be to give tax benefits to trading further-out futures contracts. For years traders could buy far-out futures contract to defer taxes to another year. When the tax laws allowed that in the past the further-out futures contracts were very liquid. The deferred tax's loss to the government would be more than made up from the benefits of longer term supply stability and increased investment would smooth out the huge boom and bust cycles in the market. Governments could also act as market makers in certain far out contracts to help attract those speculative dollars.
Why is an active far out future so important to a vibrant economy? Just ask the International Energy Agency. Just today, as quoted by Dow Jones, the IEA laments that more oil supply and robust data is needed globally to curb market volatility. The IEA's Executive Director Nobuo Tanaka said more production would add narrow buffer in the market between spare production capacities, stock levels in consuming countries causing price fluctuations. "If the buffer is larger, it can absorb special events or accidents that could trigger the fluctuations. He says that producers need to keep up investment to prevent volatility from returning. (Sure but will they when oil prices have gone bust.) The IEA says that more robust data is also needed for accurate demand projections. (I agree. We need more transparency. Yet at the same time oil futures markets have been the best predictor of future demand trends. So we need more speculators).
And those speculators today will focus on today's oil inventory report. Are there any signs that consumers inspired by those low gas prices will actually fill the SUV and go over the river and through the woods to grandmother's house? Well according to the MasterCard Spending Pulse report shows that perhaps we will actually get back into our cars. MasterCard said that rising consumer confidence led to rising gas demand as for the week ending November 21, 2008. U.S. motor gasoline demand increased 1.201 million barrels, which is up 1.9% when compared with the week ending November 14. MasterCard says that when compared with the comparable week from last year demand was down 1.2%. This is the smallest year-over-year decline since April 18, 2008. Still Master Card warns that there tends to be some volatility in year over-year comparisons this time of year as Thanksgiving shifts from one week to another.
I have a lot to be thankful for this Thanksgiving and I want you to know that one of the things I am thankful for is all the loyal readers of The Energy Report. I thank you all for your interest, comments, and suggestions. You have really made this a wonderful year. You have all been great! So a sincere "Thank you" to all of you and Happy Thanksgiving!
We're short January crude oil from approximately 5760 - stop 5700!
Buy January heating oil at 16300 - stop 15900.
Buy January RBOB at 12500 - stop 12400.
Buy January natural gas at 615 - stop 570.
Phil Flynn is vice president of Alaron Trading and a Fox Business Network contributor. He can be reached at (800) 935-6487 or pflynn@alaron.com.
