Energy report: Market goes contango crazy

Crazy contango, oh my! Say good-bye to the May crude oil futures contract that went out in an impressive rally and a mission to close the wide spread between front end of the crude curve.


The oil market has been going contango crazy in recent weeks as bullish construed hopes ran high. Those dreams seemed to gain momentum when crude surged to a 17 month high in a volume deprived holiday week. Of course that was a precursor to near record volume and the inspiration that Iran might take oil and store it in tankers. Yet the lack of follow through caused the spread to come in dramatically. John Kemp, a market analyst with Reuters News, said that the abrupt widening of the contango in crude has wrong-footed a large number of traders, if the big spike in Nymex volumes is anything to go by. Kemp says that the consistent rise in prices, and increasingly bullish prognosis, almost certainly drew in a large number of trend-following technical traders in size, hoping to ride a sustained rally. The subsequent breakdown of the rally would have probably triggered downside stops set to lock in profits on the trade. But Kemp theorizes the daily price changes were relatively small. In fact volatility was falling to some of the lowest levels witnessed in the past decade during this period. Unless stops were being placed unusually close to the market (signifying nervousness among the trend traders) or the technical funds were present in the market in unusual size, they could not account for so much concentrated turnover on such a small price move. But while movement in price was small, Kemp points out that the moves in spreads were much bigger, certainly big enough to flush out any fundamental or technical trader. Kemp says that many traders expected the spread to shrink further or turn negative and leading analysts predicted that the market would flip from contango to backwardation as a result of a tightening supply and demand balance and the continued drawdown in stocks. Instead the spread flared out rapidly and massively. In seven trading days the spread between May-December strip soared! Interesting take by Reuters.


Corn farmers rejoice! Bloomberg News reports that U.S. senators Charles Grassley and Kent Conrad introduced a bill that would extend the government incentives that would help support ethanol. Go long corn and short gasoline perhaps. Well to be honest I think that would be a good trade long term. Of course we still feel the best way to trade RBOB, crude and products is the range. As you can see the spreads in the market are treacherous and the risk versus the profit potential in trying to trend follow the market just does not seem to be there right now.

Are you worried abbot the great transfer of wealth in this country because of our dependence on foreign oil? Do you want to know who to blame? Blame Canada, blame Canada! While we import more oil from Canada than any country on the globe, their economy is booming. No wonder they have free health care! We are paying for it with our oil money! And now Canada is talking about possibly increasing their interest rates soon and removing some of the economic stimulus that they have pumped into their economy. This news drove the Canadian dollar over par with the dollar. Now think about of the impact on Canadian beer prices in the US. Moosehead is going to go through the roof. We can't even afford to drown our sorrows anymore. Good thing we at least took a lot of gold during the Olympics. Now if we could only get a rematch in hockey.

The oil market got pressure from some numbers from the American Petroleum Institute that just did not seem to add up. The API reported that crude stocks fell by 741,000 barrels. They reported that gas stocks fell by 1.7 million barrels and distillate stocks by a dramatic 3.1 million barrels. Why such a distillate drop? Was there a cold front last week that I was not aware of? This came as crude runs are up and product imports are up. Does 2 plus 2 equal a negative 5?

Could Goldman fraud charges from the SEC turn out to be "Goldmangate: the next big political scandal". Yesterday I said that the White House is already trying to distance themselves from the Goldman charges because any implication that the White House had a say in the timing of the fraud allegations ahead of the debate on financial reform may indeed be fraudulent in and of itself and an abuse of power. The White House cannot be seen as having a major regulatory authority be used to further its own political agenda. I said that if there is a perception that the SEC is being controlled by the government for political reasons to push financial reform, it could be more dangerous to the economy then Goldman's alleged fraud. These same concerns are being raised by Republicans in Washington. Politico reported that Rep. Darrell Issa, the top Republican on the House Oversight committee, is demanding a slew of documents from the Securities and Exchange Commission, asserting that the timing of civil charges against Goldman Sachs raises, "serious questions about the commission's independence and impartiality." Issa's letter, addressed to SEC Chairwoman Mary Schapiro and signed by eight other House Republicans, asks whether the commission had any contact about the case, prior to its public release, with White House aides, Democratic Party committee officials, or members of Congress or their staff. "[W]e are concerned that politics have unduly influenced the decision and timing of the commission's controversial enforcement action against Goldman," Issa writes. Issa implied that the timing was a bit too convenient, saying Barack Obama's push on Wall Street reform, "neatly coincided with the commission's announcement of the suit." The letter is also signed by Republican Reps. Jim Jordan of Ohio, Jason Chaffetz of Utah, Patrick McHenry of North Carolina, Dan Burton of Indiana, John Mica of Florida, Blaine Luetkemeyer of Missouri, Aaron Schock of Illinois and Anh "Joseph" Cao of Louisiana. Politico says that White House press secretary Robert Gibbs dismissed the connection Issa was trying to make. "The SEC doesn't notify the White House of its enforcement actions and certainly didn't do so in this case. ... It's not as if the president began talking about financial reform sometime on Friday afternoon."Still the larger implications about the way these charges were brought raises concern. If Goldman is guilty of fraud, by all means go after them but we cannot worry that the executive branch of the government is using the SEC to try to further a political agenda.

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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