Data suggests weak crude oil demand

Last week the Federal Reserve lowered their expectations for economic growth and let the world know that it was going to reinvest its cash from maturing mortgage debt holdings into treasuries, keeping the size of its balance sheet stable and avoiding what could have been perceived as a tightening of monetary policy. Somehow the market panicked over this. We saw the markets react with fear and the trade went to risk aversion mode. At first the commodities rallied and the dollar broke as the market felt that the reinvestment, while perhaps not quantitative easing in the traditional sense, was at the same time the Fed keeping previously hot off the presses printed money in the marketplace, not to mention a little interest with old money as opposed to reducing the money supply. Because that was a change in what the Fed had originally planned to do, the first reaction was to sell the dollar and buy commodities. Fear started to set in. What if the economy is really getting worse? What if we go into a double dip recession? What if this so-called "quantitative easing light" is not enough? If things are that bad, should they not be doing more? Now playing into that paranoia was weak data out of the U.S. and China and the fear trade went on. The dollar rallied and the VIX rose. Stocks got hammered and so did oil and gold. Yet we ended the week with good data out of Germany and the market seemed to have the weekend to digest the Fed move and now the markets seemed to grasp the reality of what they did. Bonds rallied but not so much out of fear but the reality that today, Tuesday, the Fed is going to start buying back treasuries. Oh sure some pointed to weak data in Japan, but doesn't that just confirm what we already know?

Copper staged a comeback overnight and the market seems to know that the Fed's printing presses are at the ready at any given moment. The crude oil market has to balance the fact that the global economic data suggests that demand will be weak and supplies will most likely rise. That is despite recent reports of floating storage falling. Bloomberg News reported that oil bulls at Goldman Sachs said that based on a drop in floating storage hitting an 18 month low, global crude oil demand may have exceeded supply in the past two months. Now that floating storage has dropped to its lowest levels in over 18 months, we expect to experience declining onshore inventories in coming months," Goldman Sachs analysts including David Greely and Stefan Wieler said in a report today. "Given that world demand tends to increase seasonally in the second half, we would expect the draw on world inventories to accelerate." Oil held on ships may have dropped by as much as 40 million to 45 million barrels in June and July, in part due to the clearing of a "large portion" of Iranian floating storage, Goldman said. As floating storage has fallen, on shore inventories have risen. Oil in storage in the U.S., for example, is within shouting distance of all time highs. There is still plenty of spare global production capacity and refining capacity. Even with a normal uptick in seasonal demand we are probably better supplied on a global basis going into winter that have been in recent memory. First trade above $100 a barrel was a bad trade.

Greg Meters at the Financial Times reports that the Commodity Futures Trading Commission (CFTC), the U.S. futures regulator, on Monday fined a commodity trading group $12m for artificially pushing crude oil prices to $100-a-barrel for the first time in 2008. The CFTC said a trader at a former unit of ConAgra Foods, bent on driving oil to triple-digit levels, caused a "non-bona fide price" to be reported for the benchmark U.S. crude futures contract West Texas Intermediate. Gavilon, the commodity trading house, later bought the unit's trading operations. The fine, which was agreed on by the CFTC and the current owners of the trading unit, comes more than two years after crude oil futures surged to a record $147 a barrel. The settlement sheds light on one of the more mystifying moments in oil's price rally. On the first day of trading in 2008, a single contract for $100 oil changed hands on the floor of the New York Mercantile Exchange even as the electronic market was trading at a substantial discount. The trade perplexed market participants at the time.

The CFTC said ConAgra's floor broker, whom it did not name, acted at the bidding of a trader at ConAgra Trade Group. Traders at the time identified the person handling the purchase as Richard Arens, a long-time floor broker at Nymex. A message left on Monday at Mr. Arens' home was not immediately returned. "The trader said that CTG had instructed its floor broker that CTG had wanted to get the $100 print for as long as three months prior to January 2, 2008, and that 'we weren't gonna let that one get away from us'," the CFTC said. The U.S. regulator quoted a CTG trader saying: "Within freakin' 25 cents [of $100 a barrel], I'm just gonna be a madman." I am glad the CFTC took action. This illegal activity can give the business a bad name and is absolutely uncalled for.

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.

 

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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