Finding safety through value or is it finding value in safety; and at this point, does it really matter? The value of commodities changed not necessarily because of any major changes in demand expectations, though there were obviously some, but more precisely because of how these things are valued intrinsically in a world with economic turmoil surrounding us at every turn. It's all about safety and an aversion to risk and the type of market that reminds us how much confidence means in this current environment. Once again and the quest to move capital where it will be the most safe drove the price of oil more than any major changes in hard core supply and demand expectations. Of course on a day to day basis the perception of what is safe and to what degree it's safe, seems to be changing as fast as or faster than the markets. Yesterday the market had that bad feeling in the pit of the stomach and it knew things were just not right.
What gave the market that feeling? Oh, I don’t know. Maybe it was the word of another government bailout of AIG. Or maybe it was the $61.7 billion losses that followed it. Maybe it was because HSBC Holdings said it needs to raise capital sending British banks into their biggest tailspin since 1985. Or might it have been those words of wisdom from the mythic investment guru Warren Buffet who said that the economy is and will be in a shambles. Maybe it was another Obama appointee with tax issues. Help!
Over the last few weeks, that sinking feeling meant to run and hide in gold. Fear mounted and the yellow metal with limited global supply surged as traders ran to the granddaddy of all safe havens to find its place of inner serenity. Yet gold can only carry so much weight as the balance of relative risk between the currency that gold is priced in seems to be finding favor as a safe haven of its own. Yesterday money seemed to flee Europe as divisions between the old Europe and new Europe seemed to fester. Risk premium rose as economic chaos spread out in the Ukraine as the people there are blaming the government for the economic problems and word that depositors to certain banks cannot withdraw their funds. In fact Bloomberg News reports that, ”While Russia’s government said the economy will contract for the first time in a decade and currency reserves are down 36 percent from August, the nation’s relative strength is raising Prime Minister Vladimir Putin’s influence over former Soviet states. Ukraine discussed borrowing $5 billion. Kazakhstan wants Russia to buy ailing BTA Bank Belarus is asking for $3 billion in loans, on top of $2 billion granted last year.”
But Russia has its own problems. With its plunging stock market and too many shut downs of the markets there altogether. As Bloomberg put it, “Last year, international investors fled Russia after its war with Georgia, a 54 percent decline in the price of Urals crude and the global credit crisis sent the Micex down 67 percent. Speculators targeted the ruble, driving it 20 percent lower against the dollar and 19 percent versus the euro. Bank Rossii spent $216 billion to keep the currency’s seven-month drop from turning into a rout.”
Those fears crescendo with HSBC news and the contentious meeting in Brussels with members of the former Soviet bloc nations and the old Europe guard. Then it was all about running to the dollar despite the fact that our stock market was getting crushed, it was about running to treasuries driving down yields despite the fact we have a record supply of paper. It was a tacit acknowledgement that at least at this point in the crisis the USA is ahead of the curve and is taking the role of leadership even if that means following us off a cliff. If the dollar reassumes leadership and strength in the global market place, we will have to adjust downward or perception of what a fair price for commodities will be across the board. If on the other hand the market finds solace in some other pristine spot of safety somewhere on this glorious globe, commodities could rally relative to the haven of safety.
Last week of course we saw optimism that OPEC cuts and increasing gas demand could rally oil. Those sentiments were forgotten in yesterday’s bloodbath. With the appetite for a little risk creeping back into the complex, we can focus on supply and demand. Oh yes OPEC compliance has been impressive and the market is pricing in another 1 million barrel a day production cut but there are signs that OPEC is getting tired. When Iran the production hawk is suggesting that enough is enough on cuts you might imagine OPEC’s realistic ability to cut back production is very much in doubt. That is unless Saudi Arabia becomes magnanimous and decides to shoulder the load for the entire cartel. OPEC needs revenue and may be close to its maximum level that they can cut back and still have revenue flowing. Pump at any price may soon be their mantra if the economy continues to slide into oblivion.
Thanks for all of you interest! The Energy report is bigger than ever! Feel free to call me any time at (800) 935-6487 or email me at pflynn@alaron.com to open your account. It might be time to use futures to protect your stock portfolio. Business that has exposure to futures should call for an analysis in hedging! Tune into to see me each day on the Fox Business Network!
Sell April Crude approximately 4570 - stop 5100
We're short April heating oil from approximately 12342 - stop to 12900
Sell April RBOB at 14000 - stop 14300
Sell April natural gas at 467 - stop 499
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.
