Energy report: Bond yields are early warning sign for oil bulls

Bird Watching

If you are trying to figure out the direction of the next big move in energy perhaps you should be watching the birds, specifically canaries. Despite the fact that the bad ADP employment number is rallying the bond market, rising bond yields are sending a message to the financial markets and raising concerns about our historic 1.4 trillion budget deficit. Bond traders have taken notice and oil bulls need to pay heed as well. Beware it may be the old "canary in the coal mine" according to Former Fed Chairman Alan Greenspan.

Last week Mr. Greenspan warned that rising bond yields were like the canary in the coal mine, an early warning signal based off the fact that miners used canaries to give them an early warning of the presence of methane gas. Mr. Greenspan warns that this spike in yields reflects growing concerns "this huge overhang of federal debt which we have never seen before" will eventually take its toll on the economic recovery and drive up borrowing costs. Of course higher yields are a bad thing for oil bulls that have depended on low yields and a weak dollar to prop up the price of oil.

The value or the devaluation of the dollar has added anywhere from $10 to $15 per barrel to the bottom line cost of oil. It is probably even more when you factor in the simulative effect to demand growth created by easy money. Not only that global economic stimulus around the globe has driven oil demand higher than it would have been unless it was being supported by money being printed out of thin air. Now if the Fed is being forced to raise rates faster than it wants and the market forces this country and others into a rash of fiscal discipline (heaven forbid) then oil may be in for a big fall. Not only will the weak dollar strengthen driving oil and other commodities lower but rising rates will slow demand growth for oil here and abroad. Maybe trying to pick a top in oil is for the birds but when it happens do not say you were not warned.

President Obama is showing that he wants a balanced U.S. energy policy. According to many media reports the Obama administration is proposing to allow offshore drilling for oil and natural gas in the waters along the Atlantic coastline, the eastern Gulf of Mexico and the north coast of Alaska for the first time in history? According to New York Times "the eastern Gulf of Mexico tract that would be offered for lease is adjacent to an area that already contains thousands of wells and hundreds of drilling platforms. The eastern Gulf area is believed to contain as much as 3.5 billion barrels of oil and 17 trillion cubic feet of gas, the richest single tract that would be open to drilling under the Obama plan." Still as the Times says It is not known how much potential fuel lies in the areas opened to exploration, although according to Interior Department estimates there could be as much as a three-year supply of recoverable oil and more than two years' worth of natural gas, at current rates of consumption. But those estimates are based on seismic data that is, in some cases, more than 30 years old."

This is a courageous and smart move by the Obama administration as any real energy policy that does not include off shore drilling and relies on just "green energy" is a fantasy pipe dream. President Obama is showing he is at least attempting to show that he is a realist and is acknowledging that it is vital to the interests of the American people that we use our technology and resources to enhance our national security as well as our ability to compete in an increasingly competitive economic world. This is a big step forward from the days when President Obama thought that making sure our tires wear properly inflated was a better option than offshore drilling. I do not think we will hear much about tires at today's speech.

Today's ADP report supporting oil early. We will see if it will stay that way after the doe! Stay tuned!

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

 

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