How to you get seven winning sessions in oil in a row? You get it when all the news is bullish. What kind of news? Well any kind of news because we seem to be living in a world where good economic news for oil is bullish and bad economic news might be bullish too. Not all bad economic news mind you but at least the type of news that can weigh on the dollar.
The dollar got smashed on fears of more continued runaway government spending after another 30 billion dollars for bankrupt GM was given. The dollar is weakening as the country faces a towering budget and trade deficit that Treasury Secretary Tim Geithner assures the Chinese we will be able to get under control someday. That is sort of like when a drug addict says he swears he is going to quit someday very soon.
Mr. Geithner wants to assure China that its hundreds of billions of dollars of holdings in U.S. government debt remain safe even as the dollar and 10-year note was signaling perhaps otherwise. The risk appetite in the market is returning and the dollar is losing its safe haven appeal unless of course until we see some type North Korea/Iran conflict fears arise.
Yet at the same time hope springs eternal and the hope for the spring green shoots (gosh I hate that phrase) seem to be picking up or at least some leveling out in the global manufacturing sectors. The ISM manufacturing number in the United States hit the highest level since September, rising to 42.8 in May from 40.1% in April. Still a long way from expansion but on the heels of the strong data out of China it was welcomed by the stock market.
This type of good news and bad news moves the oil market and is, well how should I say it, BULLISH! Oil set new highs because the dollar is getting pounded but also rallied on hopes the economy has bottomed out. We saw a massive move in the long end of the yield curve as the 10-year note had its biggest one day surge in eight months. We saw other industrial commodities soar as evidenced by the copper market. We saw grains go goofy. We saw silver bulls ringing and salivating. We saw commodities rock the house as both the supply and demand fundamentals improve at the same time the inflationary and currency exchange rate fundamentals fed into the rally. This rally is for real. It is not just smoke and mirrors and though overbought, do not call it a bubble. The market is pricing in an expensive energy reality.
This is a reality that is even more bullish due to the anti-petroleum policies of the Obama administration that is adding even more to the real cost of energy. The market is pricing in the cap and trade legislation. Martin Feldstein of the Washington Post reports the Congressional Budget Office recently estimated that the resulting increases in consumer prices needed to achieve a 15% CO2 reduction— slightly less than the Waxman-Markey target — and would raise the cost of living of a typical household by $1,600 a year. Some expert studies estimate that the cost to U.S. households could be substantially higher than that. The future cost to the typical household would rise significantly as the government reduces the total allowable amount of CO2. That type of tax increase would defiantly have to show up in the bottom line retail cost of oil and products. The futures markets are already pricing that in.
As Obama’s administration and the democrats in control of the House and Senate continues to discourage investment in petroleum by moving in legislation, at least someone is looking to expand investment in petroleum and that one country is none other than Venezuela. Bloomberg news is reporting that Petroleos de Venezuela SA, the state oil company, will invest $12 billion to $13 billion this year and “at least” as much again next year as it seeks to expand crude output and refinery capacity.
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 .
