Energy report: Bernanke saves economy?

He can raise rates faster than a speeding bullet, has words more powerful than a locomotive, able to leap tall buildings in a single bound. Look up in the sky! It's a bird! It's a plane! It's super Bernanke! Yes it's Super Bernanke, strange visitor from another planet (Princeton) who came to earth with powers and abilities far beyond those of mortal men. Super Bernanke can change the course of mighty markets, break banks with his bare hands and disguised as Gentle Ben Bernanke, mild mannered Fed Chairman for a great central banking system, fights the never ending battle for truth, justice and the American way.

And we didn't even have time to thank him; bummer. Global stock markets rejoiced as the Fed Chairman recounted how he, along with help from his trusted fellow central bankers and an unprecedented amount of printed cash, saved us from a global disaster, a fate so terrible that it might have made the Great Depression look like a summer vacation. Bernanke, after his recounting of the crisis that has gripped the world said that, "the world has been through the most severe financial crisis since the Great Depression. The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge. As severe as the economic impact has been, however, the outcome could have been decidedly worse. Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year monetary, fiscal, and financial policies around the world have been aggressive and complementary. Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk. We cannot know for sure what the economic effects of these events would have been, but what we know about the effects of financial crises suggests that the resulting global downturn could have been extraordinarily deep and protracted." In other words, if it were not for Ben we'd be in deep.

For better or worse the Fed Chairman deserves some credit as it appears that things are indeed getting a bit better. Some might wonder if his Jackson Hole speech might be compared to President Bush's "Mission Accomplished" speech. If you fear a double dip recession or if you believe that Bernanke's policies will only create bigger problems in the future you may want to save this speech. Yet what choice did the Fed Chairman have when the global credit markets began to collapse? Mr. Bernanke was compelling when he said that, "One very clear lesson of the past year--no surprise, of course, to any student of economic history, but worth noting nonetheless--is that a full-blown financial crisis can exact an enormous toll in both human and economic terms. A second lesson--once again, familiar to economic historians--is that financial disruptions do not respect borders. The crisis has been global, with no major country having been immune." I wonder if he was telling that to Jean Claude Trichet. "History is full of examples in which the policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs. In this episode, by contrast, policymakers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation. Looking forward, we must urgently address structural weaknesses in the financial system, in particular in the regulatory framework, to ensure that the enormous costs of the past two years will not be borne again."

The London Telegraph reports that, "Jean-Claude Trichet, president of the European Central Bank, has rounded on his US critics over charges that he has been too cautious in the way he has handled the economic and financial crisis in the euro zone." The Telegraph says that, "He mounted the vigorous defense at the annual symposium by the Kansas City Federal Reserve at Jackson Hole, Wyoming, where the policies of the world's major central banks, the ECB, the US Federal Reserve and the Bank of Japan were examined by economists."

Critics accused Mr. Trichet and the ECB of waiting too long to cut interest rates and being more cautious than the Fed in the way they attempted to stimulate the euro zone. Mr. Trichet argued that the ECB was guided by its primary aim of delivering stable prices and the need to revive bank lending. He said: "Criticizing a central bank that is acting with a steady hand for being 'behind the curve' rather misses the point. A gradualist approach of this kind may be the most effective antidote to the threat of price stability." Of course Mr. Trichet had no qualms about criticizing Fed Chairman Bernanke when he called on the euro zone. Trichet said that, "We see some signs confirming that the real economy is starting to get out of the period of free fall." But, he added the improvement, "did not mean that we do not have a very bumpy road ahead of us".

Natural gas price are at a seven year low. Demand prospects are the worst they have been is recent memory! What a great time to invest in independent natural gas companies! I am serious! Take this very interesting article in today Financial Times that says, "A growing number of foreign energy companies eager to tap into America's vast natural gas reserves are looking to invest in independent companies, while estimates of US supplies continue to increase.

BP and BG Group of the UK and StatoilHydro, the Norwegian energy company and Eni, the Italian oil company, have all bought into the US gas industry in the past year to gain access to the US industry while tapping into the independent groups' experience and technical expertise. PFC Energy, a consultancy, estimates advancements made by the independents - which carry out exploration and production of the natural gas but not refining - in developing natural gas from shale could, if taken abroad, more than quadruple, increasing supplies of this alternative option to greenhouse-intensive oil, coal and oil sands fuels.

The Financial Times goes on to say that the, "US is now believed to have 100 years' worth of resources, at today's usage rates, up from about 30 years just three years ago. Given political concerns over carbon, the industry believes natural gas will have a major role in the energy future of the US and the world. This belief has stoked interest in spite of the drop in the natural gas price to about $3 per million British thermal units, down from last year's record high of $13.694 per million metric Btu."

Yet the companies recognize that working shale gas is different from conventional production. The shale rock must be fractured with high-pressure water to produce the gas, which has been absorbed in the rock, trapped in the pore spaces and confined in fractures. And new wells must constantly be drilled to maintain production. Aubrey McClendon, chief executive of independent Chesapeake Energy there was an "enormous worldwide interest'' in US shale resources. "There are acquirers from all parts of the globe currently kicking tires on US shale plays.' Chesapeake expects to do one more deal by the end of the year. A must read in today's Financial Times.

Now that Big Ben Bernanke has saved the global economy from ruin can oil supply meet the demand? Last week we saw supply mysteriously disappear as Gulf Coast imports grounded to a halt. I expect a big rebound this week and that may cap this Ben Bernanke bad man rally. Still if stocks keep soaring and the dollar keeps falling the crude price can go higher. Longer term we still see the downside correction will end up being greater than the upside move. Yet short term we have to respect the market mood.

Sell October crude at 7520 - stop 7620.

Sell October heating oil at 19500 - stop 19700.

Sell October RBOB at 20550 - stop 20900.

Buy October natural gas at 310 - stop 305.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or pflynn@alaron.com.

Contango and confused, the oil market is still desperately trying to find its own personality as it tried to ignore the rest of the macroeconomic news all around us. With September crude in its final hours, it somehow did not seem right to set a new high price for the year by default. October crude came down in a collapsing contango that kept oil from setting a new high for the year. So today if oil is going to break through to new heights, the October crude is going to have to do it on its own merits.

The spread between the front and the back months in oil and whether or not that would mean a new high price for the year was really just a minor footnote in the history books as compared to the spread between the price of oil and naturals gas. The gap between U.S. natural gas and oil futures prices reached the widest margin ever. Dow-Jones did the math showing that the spread between natural gas and crude expanded to about 24.5 to 1. The ratio since the Nymex gas contract began trading in April 1990 historically has varied between 6.5 to 1 and10 to 1. Now gas demand is plummeting and new onshore gas production from shale rock may be setting a new standard.

Earlier this year for the first time ever, proven natural gas reserves in this country actually went higher. New technologies like "fracking," which is basically shooting water and chemicals into rocks to force the gas out, or old reservoirs is taking more production on shore as opposed to off shore. At the same time because the U.S. gas market is mainly a domestic market it is less impacted by the value of the dollar and global exchange and shipping rates. Normally when the gas oil spread widens you see switching to the cheaper fuel but because the spread has been so wide so long anyone that was going to switch probably already has done so. Industrial demand for gas has plummeted as has electricity driven demand as we have had a cool summer.

We have a natural gas glut. A glut that was thought to be unthinkable just 5 years ago when the world thought that U.S. gas production had peaked. A time when then Fed Chairman Alan Greenspan said that the ability to supply our nation with natural gas was a major threat to our economy. At that time the chairman said that the United States needed to expand the global trade in natural gas as a way to prevent future sharp price increases from harming its economy. Mr. Greenspan underestimated the ingenuity that high prices could bring and our gas crisis would not be solved by imports but by technology. Of course at that time environmentalist were appalled at the prospect of building LNG plants. Now they are unhappy with fracking. The bottom line is you can never please an environmentalist.

Oil prices are surging on strong data out of Europe! Reuters reports that, "the decline in the euro zone's dominant services sector almost came to a halt in August and businesses' expectations for the future soared to their highest level in more than two years," a key survey showed. Data also showed manufacturing activity contracted at a far slower pace than expected and output rose for the first time in 15 months, suggesting that the broad euro zone economy has stopped contracting after its worst recession on record. Markit's Eurozone Flash Services Purchasing Managers Index (PMI), compiled from surveys of around 2,000 companies, climbed to 49.5 in August from 45.7 in July, its highest since May last year and smashing expectations for a rise to 46.5. Euro zone government bond futures fell to a session low after the figures after getting knocked down earlier on the companion German PMI data, which also came in above expectations.

The Fed may be the oil bull's biggest fear. Big Bad Ben Bernanke will give a speech today at the Kansas City Fed Economic Symposium in Jackson Hole, Wyo. The title of Bernanke's speech is, "Reflections in a Year of Crisis." Soon to be a major motion picture we're sure! Traders do not want reflections they want to hear about an exit strategy. Dallas Fed President Richard Fisher though seemed to suggest yesterday that the Fed may end its quantitative easing program sooner rather than later.

Can Iran live without petrol? The Obama deadline on sanctions on Iran is September and unless the Iranians agree to take on a six-power offer of talks on trade benefits if it shelves sensitive nuclear enrichment, the Obama administration has hinted it would cut off gasoline supplies to Iran. While Iran is the world's fifth-largest crude exporter in the world its refineries lack the capacity to meet domestic fuel demand so it imports up to 40 percent of its gasoline. Yet as Reuters' news reports President Mahmoud Ahmadinejad shrugged off the impact of any sanctions targeting Iran's gasoline imports and suggested it would soon be able to meet its own needs. The semi-official Fars News Agency quoted him as saying: "The Iranian nation is no longer afraid of any threat or sanction."

Stopped on short October crude from apprx 7250 at apprx 7320.

Sell October heating oil 19500 - stop 19700.

Sell October RBOB 20550 - stop 20900.

Buy September natural gas at 270 - stop 248

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or pflynn@alaron.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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