Shanghai not so surprising.
Oil prices got Shanghaied as an initial public offering in China sent global stock markets and oil on another run. In China’s first public offering since June, Sichuan Expressway rose 203% from its initial offering price according to Bloomberg News.
Because oil and the petroleum sector are more focused on the possibility of a quick global recovery than current high supply and weak demand, oil will be totally driven by the movements of the stock market. Oil tends to ignore ample supply of crude, even more so because the thinking is that a recovery in demand from China will eat away at the global oil supply.
In fact, in a small way, that may already be happening. My buddy Linda Rafield at Platts points out that over the past three months; U.S. commercial crude stocks have declined a cumulative 32.57 million barrels to 342.688 million barrels, which she says is not a low level of inventories by any historical standard. At 342.688 million barrels, U.S. commercial crude stocks were still 22.658 million barrels above the five-year average and 47.358 million barrels above year-ago levels. But Linda says the surplus against the five-year average is at its lowest level for this year, having been eroded by about 50%. So it seems in a small way inventories are starting to change direction as demand and cutbacks in OPEC production start to take its toll.
Still the oil market was lifted by the promise of stocks yet in the short term; Oil should hit a top, reverse course and then resume the uptrend. If the economy gets better or worse the likelihood for a correction is rising. We are thinking we are in a blow off top phase. You do not want to stand in front of the market yet it may be time to put on your bearish option strategies.
Driving markets back to the dark ages or at least the dark markets! Have you been following the UNG Saga? The SEC has been dragging its heels on approving more shares forcing the fund to explore less transparent ways to hedge the fund. Now this week the Commodity Futures Trading Commission is holding hearings on potentially limiting natural gas futures trades. Yet will the impact of position limits just reduce transparency and foster more trading in off exchange transactions? On Friday Bloomberg news reported that United States Natural Gas Fund, the world’s largest fund in the commodity, has changed its investment strategy, buying a $250 million bilateral swap that isn’t subject to regulatory position limits. It’s the first time the fund has used an off-market trade to mimic price changes in the fuel!
UNG fund has grown 11-fold since the start of the year to 347.4 million shares before it ran out of new shares on July 7. It is awaiting permission from the Securities and Exchange Commission to sell 1 billion more. John Hyland, the fund’s chief investment officer, told Bloomberg that, “We have worked under these assumptions for three and half years, since we introduced the first fund in oil, that if the funds reached a certain size, they would, for a variety of reasons, including regulatory concerns, have to start to make use of alternatives to the futures. These total return bilateral swaps were the most obvious alternative.”
In other words the law of unintended consequences of over regulation is already happening as The CFTC and SEC react to emotional ramblings of the uniformed in Washington. The SEC and CFTC may try to reign in what they call over speculation but may just push it to dark markets. Avoid the darkness! Demand common sense from Washington before they do more damage to the average American.
Now how abut some good news! The price of gasoline fell about 7¢ a gallon during the past two weeks! So says the goddess of gasoline Trilby Lundberg who reports that gas prices are down to $2.49 for a gallon of regular unleaded. But Lundberg warns that it appears the rate of decline is slowing. Those darn creeping crude prices are the culprit.
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 .
