Oil rallies as U.S. hints Europe is next too big to fail

Forget about all of that stellar manufacturing data and jobs data. Ok sure, that may have helped rally the euro, yet it was the story that the U.S. stands ready to bail out Europe that sent the dollar falling and oil on a second wind rally. Reuters News reported that an unnamed U.S. official said the U.S. was prepared to support the European Union's rescue fund through the International Monetary Fund and the largest contributor is the U.S. The official said the spread of contagion through the euro region would be a problem for the global economy and because of that, I guess the U.S. printing presses are ready to roll. In other words, it looks like the U.S. just said that we are going to make good on all of Europe's bad debts and make sure that European citizens can retire when they are 50.

Ok maybe they did not say that exactly and they defiantly did not say anything about Europeans retiring when they are 50 (maybe it was 60). And later the story was denied, but don't you tell that to the investment world because once you make a statement like that, it is hard to take it back. Based on the weakness in the dollar after the story broke, it seems the market is convinced that come hell or high water the U.S. will back Europe in their time of economic need.

If the market believes it then there is a lot of pressure on the IMF and the US to make it so. If you don't think so then you have forgotten the lessons of Fannie and Freddie. They were entities that were supposed to be independent, but investors like the Chinese were led to believe that the government sponsored entity was backed by the full faith and credit of the good old American taxpayer. The same taxpayers that we have found out have backed a wide contingent of foreign banks already.

As reported by the Financial Times, "Foreign banks were among the biggest beneficiaries of the $3,300 bn in emergency credit provided by the Federal Reserve during the crisis, according to new data on the extraordinary efforts of the US authorities to save the global financial system. The revelation of the scale of overseas lenders' borrowing underlines the global nature of the turmoil and the crucial role of the Fed as the lender of last resort for the world's banks."

Now the Federal Reserve is the lender of last resort to the Euro retirement and health care funds. Why does this matter to the oil market? Well because the dollar weakened as the market sensed that if the Fed is on the hook for Europe, they will be printing a lot more money. That of course will be paid for in part by the U.S. raising their retirement age and paying more for gas as recommended by the budget commission. It also will inspire more bad behavior and perhaps more wild investments as the risk of loss gets skewered when we know that Uncle Sam will be there to bail you out.

Gas prices soared on a rash of refinery problems and the latest has a refinery in Venezuela shut down due to flooding. The economic data was a lot more exciting than the Energy Information Agency data and had more to do with the market moves than the current supply and demand situation.

The EIA reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.1 million barrels from the previous week. At 359.7 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories increased by 0.6 million barrels last week and are in the upper half of the average range. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories decreased by 0.2 million barrels and are just below the upper boundary of the average range for this time of year. Propane/propylene inventories increased by 1.1 million barrels last week and are in the middle of the average range. Total commercial petroleum inventories remained unchanged from last week.

As for demand, total products supplied over the last four-week period has averaged 18.9 million barrels per day, up by 2.4% compared to the similar period last year. Over the last four weeks, motor gasoline demand has averaged 8.9 million barrels per day, down by 0.5% from the same period last year. Distillate fuel demand has averaged 3.9 million barrels per day over the last four weeks, up by 8.8% from the same period last year. Jet fuel demand is 3.6 percent lower over the last four weeks compared to the same four-week period last year.

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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