Don't Give OPEC that Much Credit
In the aftermath of the big OPEC meltdown, many are attributing the strength in the crude oil market solely on the breakdown without an agreement to raise quota. While the OPEC hissy fit and the Iran led dissent against a so called production increase added an uncertainty element to the market place, there are other forces at play. Saudi Arabia, OPEC's biggest producer, is unlikely to be bullied around by a belligerent Iran and the only producers that can perhaps produce more oil like, Kuwait, Qatar and the United Arab Emirates, will more than likely try to supply more oil to the market than they would have when they showed a bit of restraint and sympathy with Iran, Venezuela and Algeria who have squandered their oil fortunes. In fact yesterday the rally in oil and products perhaps had more to do with corn than it did with the breakup of this arranged quota marriage.
Corn prices surged to a record high price and ethanol prices to a three year high as the USDA once again lowered the ending stocks of a commodity that over 40% of which will end up in our gas tanks. Grain analyst Tim Hannagan warns that when it comes to corn the US is running on empty! Consider the fact of flooding, lost acres and late planting has lowered our nations ending stocks to a paltry 695 million bushels. To put that in perspective that comes out to a mere 15 days of supply and the lowest ending stocks figure in 5 years. A number that is so small that if we have any other major weather event such as a drought, it could wipe out our ending stocks and put us in a supply deficit situation. A situation where US exports would have to be restrained to meet our own needs which would cause shortages in other parts of the world especially in the emerging markets that are going to be dependent on the US farmer and bread basket to the world to bail them out. We saw what happened to wheat prices when the Russians banned exports. A corn deficit in the US would make that wheat price spike look like a minor blip.
A corn shortage would have ramifications across the commodity complex as well as central bank policy across the globe. We already know after yesterday that Jean Claude Trichet is talking about raising ECB rates in July and Fed Chairman Ben Bernanke is defending and worrying about soaring commodity prices. Even after today's mixed news on China exports that slowed while their imports surged, it could be a sign that China is heading in to an inflationary slowdown or if you will a bit of "stagflation". Ok, stagflation is a bit of a stretch but this will mean that China's inflation data will be critical next week for a host of markets and commodities. Consider that China's exports rose 19.4% from a year earlier down dramatically from 29.9% in April yet imports surged 28.4%. Add to that the razor thin US corn ending stocks commodity price inflation angst will increase sharply.
Yet today tough talk out of Trichet over a Greek restructuring plan may add some downside pressure and if the latest bailout falls apart so too will the commodities. Dow Jones is reporting that, "There is no agreement, even "in principle," on a new aid package for Greece, a European Commission spokesman said Friday. The commission and the euro-zone governments are working on a "Vienna-style" plan that would involve Greece's private creditors maintaining their exposure to Greek debt, said spokesman Amadeu Altafaj Tardio. The fears over Greece are bearish and remember as always bailouts are bullish!
Flash crash in gas? How about flashing a bearish natural gas injection of 80 Bcf last week bring supply to 2.19 trillion cubic feet. Now that number looks even bigger with the big chill after the heat wave. It is fall like in Chicago. Boy summer sure seems to pass quicker as I get older.