Don’t blame oil speculators. Europe again came to the aid of Greece and the oil bulls know that they are fail safe. What I am trying to say that if no one defaults or if no one fails, then there is no reason to believe that prices can’t march on towards infinity (or at the very least when high prices finally kill demand).
Oil prices surged as the EU came to Greece’s rescue for the second time with a plan that creates a selective or temporary default but don’t call it that around Nicolas Sarkozy because he said that word is not in his dictionary. Yet it sure is in the rating agencies vocabulary because they declared Greece in default. The AP reports, “Fitch ratings agency said Friday that it will put a default rating on Greece’s government bonds as a result of the Eurozone’ s new plan to get banks to share the burden of helping the country. The Eurozone plan says banks will be asked to contribute billions to Greece by rolling over debt, swapping bonds or selling them back at low prices. As expected, Fitch said that because that would mean a loss for those banks, it will lower Greece's rating to restricted rating." That rating could be lifted, however, as soon as Greece issues new bonds to the banks. Those new bonds would be guaranteed by Eurozone governments.”
Take yesterday’s action for example. Oil sold off early on a slowdown in Chinese manufacturing as its Purchasing Managers Index contracted to 48.9 in July, a 23 month low. Yet that was soon forgotten by traders as word of the aforementioned Greek bailout deal shook the markets causing a surge in the Euro and causing the dollar to tank hitting the lowest level since last March. Those moves were helped along by a rebound in the Philly Fed manufacturing index which rose to a 3.2 reading from a minus 7.7. That was even enough to overcome a poor weekly jobless claims number that rose by 10,000.
It’s not just Europe. Just take a look at what the price of oil has done since Ben Bernanke put the possibility of QE 3D back on the table after most traders thought more than likely it was probably off. Just look at the low in oil at approximately 9355 the day of the Fed minutes and before they were released. Now oil poked its head above the $100 a barrel area just 7 trading sessions later. Now with the US on ratings watch look for more volatility but with an upward bias in oil.
The International Energy Agency added to the bullishness later in the session by saying that they would not release any more of that sweet oil into the market place. The IEA said that it completed its 30-day review of the “Libya Collective Action” oil release launched on 23 June and concluded that the release of oil served a market need by adding liquidity and bridging the gap to additional supplies from OPEC countries. And while the IEA stands ready to release more oil they probably will not for the rest of this year. The IEA says that the provision of extra supplies of crude, notably light-sweet crude from the US Strategic Petroleum Reserve, and products has had a number of beneficial impacts in the market. Sweet-sour crude differentials have narrowed overall, rendering light-sweet crudes more economic for refiners at a time of peak transport fuel demand. Tightness in prompt supply for light sweet crudes has diminished. Refining margins, notably upgrading margins, have improved, thus reducing the danger that suppressed refinery activity levels over the summer would lead to a products-driven supply crunch later in the year. At the same time there has been a sharp rise in OPEC oil production which the IEA estimates 30.03 million barrels per day in June a rise of 840 kb/d from May, and a possible further rise of 150 – 200 kb/d in July. The IEA estimates that higher OPEC production and the Libya Collective Action should substantially cover the expected 1.3 mb/d increase in the 3Q11 ‘call on OPEC crude and stock change."
Yet word of a potential debt deal in the US reported by the New York Times caused a sharp break in commodities until the White House and John Boehner denied it. That comes against a backdrop of an S&P warning that the US needs a credible budget deal to avoid a downgrade.
All of this news will provide volatility but with the bailout mentality the downside will be limited. Beware! Commodities could get hit hard if a debt deal in the US is reached. If not, buy the breaks and enjoy the ride.\
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 email@example.com.