Oil plunges on demand destruction fears

The great unknown

Oil markets are selling off more on what we don't know as opposed to what we do know. Oh sure, we had the great Philly Fed flop which fell to a negative 30.7, the weakest reading since march 2009 and a lousy weekly jobs number, but the volatility in those numbers would normally require patience instead of an all out selling frenzy. Yet when they come against a backdrop of concerns about Eurozone Banks it is enough to cause a panic sell off.

The great unknown of course is trying to find out just what the heck is going on with the European Banks. Is the weight of bad sovereign debt going to create the Euro version of Lehman or is it just a short term liquidity freeze. Does one bank trust another and will lending and credit dry up as banks refuse to act.

The fears came after two stories. The first one was in the Wall Street Journal and the other in the Financial Times that reported that the US Federal Reserve is concerned about US exposure to European banks and that in Europe unnamed lender decided to tap the European Central Bank Emergency Lending facility for $500 million. While that is not a lot of money, it is raising fears that we are working our way back into the abyss that we were in back in 2008.

With short term rates locked in, there was a run to the safety of long term paper and gold, and traders seemed to price in increasing odds of another global recession. We saw yields on the ten year dip below 2% for the first time ever and gold soared to record highs, surpassing platinum overnight on the classic recession fear spread. Oil prices plunged on demand destruction fears despite the fact that refiners have been seeing better demand. Add to that more fears about US real estate with a weaker than expected existing home sales number and the market was a fear driven mess. The VIX soared a whopping 35% as traders feared what might happen next.

The Financial Times also reported that the US commercial real estate market is showing even more signs of stress. The FT says, "A large percentage of US banks say that lending standards for commercial real estate loans are the tightest they have been since 2005, highlighting a continued lack of appetite for real estate investment. Some 30 percent of US banks said their standard for commercial real estate loans are the tightest they have been in six years, according to a special question in the Federal Reserve’s latest survey of senior bank loan officers, while another 37 per cent said that standards are only slightly easier than their tightest in that period."

Gas prices fell dramatically as well and were helped along by the long awaited restart at the Valero Memphis refinery. The heating oil market plunged as well.

Now the question is whether we are in a recession or are we at the bottom. The key will be Europe. We need to know the extent of the problems in the banks. We need leadership! Which means we may be in trouble. We are trading more fear than fact. The fact is that this may be forming a major market bottom. If the stocks are just testing recent lows than this could be a major long term stock and oil buy. If we take out those lows it is going to be very ugly.

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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