Number Nine. Number Nine. Number Nine. Bottle of claret for you if I had realized. We'll do it next time. I forgot about it, George, I'm sorry. Will you forgive me? What’s freakier than the Beatles Revolution Number Nine? Well perhaps the state of the global oil market on 9/9/09.
Oil prices surged yesterday as traders, fresh back from the Labor Day weekend, decided that it was a good time to take a risk. Gold bugs came out of the wood work buying on inflation fears and perhaps the dream of a new world currency order. The dollar index hit a new low for the year (taking out the 61% retracement of the rally form 2008 lows)as the G-20 said that the stimulus would continue to flow freely. Even the UN piled on to the dollar drubbing by suggesting in a UN Conference on Trade and Development report that the dollar should be replaced as the world currency. Why the market takes a “suggestion” by the UN seriously is beyond me as they can’t even seem to agree on what they agree on. Yet the anti-dollar mood is growing as rising deficits and runaway government spending is shaking confidence in the greenback. China, a major holder of U.S. debt, is actually issuing bonds in Hong Kong as it tries to establish the Renminbi Yuan as a global currency. Of course their currency is controlled by the government anyway.
All of this intrigue gave oil a reluctant boost at first but later, as some bullish news of China came to light, oil seemed to rally on its own merits. Let’s face it, as of late oil has not wanted to rally just on dollar weakness or stock market moves. This is a market that had been feeling heavy because of a heavy overhang of supply. This is a market that wants to see data that supports the type of demand growth that may at some point cut into over supply. Oil traders have been looking to China as the great demand hope yet recent data from there has been a bit mixed. Yet the report yesterday that China's auto industry saw sales growth that would make any cash for clunkers fan blush seemed to help inspire some oil buying confidence. China reported that sales of passenger vehicles increased 90% in August over a year ago. Passenger-vehicle sales in China rose to 858,300 units! China's overall auto sales rose 82% in August to 1.14 million units. That is going to be a lot of gas that is sold. That news not only gave support to oil but to platinum and palladium prices, both metals that are integral in auto production.
Do you ever wonder why it seems sometimes that Mexico is better trading oil than producing it? Yesterday Javier Blas in the Financial Times reported that Mexico is set to make a record $8 billion from financial contracts it bought last summer as insurance from weak energy demand and lower prices this year. In another story Bloomberg News reported that Mexico’s credit rating may be cut as early as next month on concern government proposals to boost revenue won’t be enough to narrow the budget deficit quoting RBC Capital Markets. “Mexico’s shrinking economy and a 31% drop in oil prices in the past year have cut into tax revenue, widening the 2009 budget deficit to 3% of gross domestic product from 2.1% in 2008", according to the government. Standard & Poor’s has warned that the country must create new sources of revenue to offset declining oil income if it is to avoid a downgrade of its debt rating before the end of the year. Maybe they should just trade oil or let U.S. oil companies fix their declining oil production rates.
After the rush to get back into the markets we will need to see more news to keep the drive alive. As impressive as yesterday was one day does not change the fact that we are swimming in supply. OPEC will stand pat and pay homage to compliance but the key is that we will need news to keep the move going. If not we should see a big correction.
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.
Buying is golden. Black gold is rising, being driven by the more traditional yellow gold as it surges above $1,000 an ounce for the first time since February, 2009. The mellow yellow isn't so mellow as its move is raising inflationary caution flags and is dragging up oil and other commodities as well.
As much as oil likes to act as a strategic investment, at times gold seems to be the shining commodity of the moment. Strong seasonal gold demand in India, as well as a weak dollar, has gold soaring helped along by China and some big mining plays. Dow Jones reports that Goldman Sachs is pumping up China metal demand expectations by saying that Chinese metals demand will remain "robust in 2009” and 2010. The reason they say is China’s government's pro-growth policy and an expanding supply of loan capital.
The move in metals has oil reluctantly rallying higher. Normally crude oil would be worrying about the upcoming OPEC meeting as opposed to worrying about the gold market. Yet the yellow metal surge is garnering all the attention. Is the move in metals just seasonal buying or is it saying something more ominous about future inflation expectations? Is it fear about another proverbial shoe dropping in the banking sector or some other economic calamity? Gold is heading towards new highs and while it is supporting oil, black gold is a long way from its all time highs.
Of course OPEC loves all of this. Life is good in the OPEC cartel. Why invite non OPEC members to the party in Vienna when all the global circumstances are going your way. It is high-five time for OPEC as they are thrilled with the state of the global oil market. Things are so good right now, members are amazed at their own success. OPEC has the price of oil in a sweet spot where they can make money and not get criticized by the global community for jacking up prices. It does not get better than that. Oh sure, they can complain about member compliance, yet at the end of the day, to have oil trading just below $70 a barrel after the greatest financial crisis in generations, well it just has OPEC doing a victory lap. They should be thanking Ben Bernanke and the rest of the globes central bankers whose swift action saved the greedy cartel from less than stellar post crises moves.
Fred is a new Tropical storm in the Atlantic. At this time Fred does not look like it is going to be a threat to the Gulf or anywhere else for that matter.
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.
