Just Because it Won't Solve The Problem
Just because it won't solve the problem does not mean it isn't bullish. Yesterday when I was singing that Ben Bernanke is coming to town and that you better not pout and you better not cry, you better be long I am telling you why, some called me to say that the Fed's action to flood the European Banks with cheap dollars won't solve the problem. Well my answer is I don't care. Of course I mean that in the trading sense, not in the sense that I don't care about the fate of the European banks and the global economy. I mean in the trading sense that whether the move solves the problem or not, or buys Europe more time, it is just very bullish for commodities. Kind of like in the movie “The Fugitive” when Tommy Lee Jones is in hot pursuit of Harrison Ford and his Dr. Richard Kimball character says earnestly that he did not kill his wife and Tommy Lee Jones character says, "I don't care." In other words, his job was not to judge whether or not the fugitive was guilty, only to get him back in custody. So what I am saying is that whether it helps the situation or not, the act of cutting the lending rate to US dollars and swaps devalues the dollar thereby driving commodities higher.
So I'll be long till Christmas, you can count on me! Please rise slow, so I can make some dough and put money under my tree! Well before visions of profits dance in my head we still have to get through today's jobs report. Expectations are rising as they should be as US economic data is showing that the US economy is picking up steam. Reuters News reports, "U.S. employment growth likely picked up speed in November, but the pace is not expected to be quick enough to bring down the country's 9 percent jobless rate. Nonfarm payrolls likely increased by 122,000 last month, according to a survey, which would outpace October's 80,000."
Now the jobs number to shake the bullish commodity momentum will really have to be lousy. Real lousy. Because if we are just a little bit lousy the commodity markets might already start pricing in another round of Quantitative Easing. If we are too strong, well then the market will focus on increasing demand. I think it is going to be hard to change the bull trend but that does not mean that we could not see some wide swings in the market.
At the same time global tensions are rising. I agree with Bloomberg News that said the EU 'Wimped Out" when it came to placing sanctions on Iran. Bloomberg said, "Who would have thought a week in which protesters rampaged through the U.K. Embassy in Tehran would end with Europe going soft on the Iranian regime? Yet that’s exactly what happened. At a meeting Dec. 1 in Brussels, European Union foreign ministers signed off on measures against some 180 individuals and companies in reaction to Iran’s continued support for terrorism and an International Atomic Energy Agency report finding that Iran had conducted secret activities ‘specific to nuclear weapons.’” This was expected and deserves a positive response (as do new penalties the ministers announced against Syria). The real news, however, was what the EU didn’t do: Announce an agreement, proposed by France and backed by the U.K., Germany and the Netherlands, to proceed with a full embargo on imports of Iranian oil. Instead, Catherine Ashton, the EU foreign policy chief, said that any consideration of steps against Iran’s energy sector would go “to the technical experts.” There are two main arguments against a European embargo: It would disproportionately harm the EU’s weakest economies, such as Spain and Greece, and Iran would simply ferret out other markets if Europe is shut off. Both are valid points but unpersuasive. An embargo on Iranian crude would doubtless put pressure on oil prices in Europe. Greece has recently stepped up its purchases of Iranian oil because other suppliers are leery of the country’s credit risk; shaky Spain and Italy use much more of it than say, France. Still, Iran accounts for only 5.7 percent of Europe’s oil imports.
And oil is a global commodity, with European prices affected by any number of variables. For example, the Nov. 30 move by the Fed and other central banks to ease borrowing costs for financial firms drove Brent crude prices to a two-week high. Should the banks’ move have been rejected over Greece’s oil concerns?
Bloomberg goes on to say, "An embargo on Iran can be coordinated with increases from other producers, and Europe already stands to see increased imports as Libya ramps up production after the ouster of Muammar Qaddafi. The costs of an embargo can be borne. As for Iran finding other buyers, more than half its exports already go to China, India and Japan, and no country likes to be too dependent on any single producer. If Europe were to sign on to an embargo, it is not unreasonable to think Japan would feel that much more pressure to join its Western political and military allies. An embargo need not be global to put pressure on the target. We have seen this already with Iran. Industry insiders suspect that it is now or will soon offer its remaining customers oil-price discounts to stay loyal -- in part because of measures the U.S., U.K. and others have taken against Iranian financial institutions that make processing purchases more difficult." A must read in Bloomberg!
Reuters reports, "China, the biggest buyer of Iranian crude, stepped in to warn against "emotionally charged actions" that might aggravate the row over the storming of Britain's embassy in Tehran. Top U.S. officials said they wanted to sanction Iran's central bank in a calibrated manner to avoid roiling oil markets or antagonizing allies. Their approach clashes with that of U.S. lawmakers pushing for faster action. In Iran, diplomats said protesters had devastated parts of the British embassy complex in Tehran. A commander in an Iranian militia which joined Tuesday's ransacking said he was tired of decades of British "plotting" against Iran. EU foreign ministers meeting in Brussels said Iran's energy, financial and transport sectors might be targeted in response to a report from the U.N. nuclear watchdog body which suggested Iran has worked on designing an atom bomb. They added 180 Iranian people and entities to a blacklist that imposes asset freezes and travel bans on those involved in the nuclear work, which Tehran says is for peaceful purposes. But they appeared to postpone decisions on a ban on oil imports."
China wants calm because they desperately need oil. Bloomberg News reports "Rising demand for fuel oil is allowing Saudi Arabia, the world’s biggest exporter, to sell its lowest-grade crude at record premiums to buyers in Asia. Saudi Arabian Oil Co., the state-owned producer, is likely to offer Arab Heavy oil for January at 25 cents a barrel more than benchmark Oman and Dubai crude when prices are announced next week, up 50 cents from December, according to the median estimate of nine refiners surveyed by Bloomberg. Arab Medium may be set at a premium of $1.60, or 40 cents higher. That would be a record for the two grades and the first time Arab Heavy is sold at a higher price than its marker."
Still the risk to oil is very high. Dow Jones reports, "The Arab Spring and the possibility of a double-dip recession pose significant risks to the world's ability to have secure energy supplies and mitigate climate change, the chief economist of the International Energy Agency said Friday. Emissions of carbon dioxide are reaching new highs, but a recession would hamper efforts to prevent climate change, Fatih Birol said at a press briefing in Budapest. The IEA said last month that if the world doesn't adopted significant new measures to reduce CO2 emissions by 2017, dangerous climate change will be impossible to prevent." Birol also warned that the political turmoil of the Arab Spring poses a major risk to oil production in the Middle East and North Africa. There is a worrying concentration of remaining oil reserves in these risky countries, he said. Oil prices are set to remain high, he said.
Gold is also very bullish! Dow Jones reports, "The Bank of Korea's move to boost its gold reserves last month is yet another bullish flag for the bullion market and should help to provide underlying support to world gold prices. South Korea's central bank bought 15 metric tons of gold from the London gold market in several batches last month, taking its total reserves to 54.4 tons as of the end of November."
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.