Oil and RBOB prices plummet as the market is not convinced that the EU can keep Greece in the zone and stop the contagion from spreading, despite the meeting of the minds between German Chancellor Angela Merkel and new French president Francois Hollande. Even Christine Lagarde, the managing director of the International Monetary Fund, is acknowledging that a Greek exit is possible and will be messy. With safe haven seekers running to the dollar and bonds, and a lowered risk of war from Iran, oil prices and gas prices are getting hit. Who could have seen this sell-off coming? Well I did.
As gasoline prices hurled higher in the early part of the year, there were some fantastic predictions. Many people were calling for gasoline to soar to $5.00 a gallon and even higher. And while in some parts of the world $5.00 a gallon gas came close to reality, the chances that the national average would hit $5 a gallon was always unlikely. The only real scenario was if we saw a war with Iran and in that case the spike was unlikely. Gas prices were being held hostage to crude prices as buyers of crude in Asia and Europe prepared for the removal of Iranian oil. Supply was hoarded and production of oil increased to meet the sudden surge in demand. As gas prices soared I warned Melissa Francis and Lori Rothman on the Fox Business Network that gasoline was in a bubble.
On February 27, in an appearance with Jeff Macke on Yahoo Finance, we discussed this very issue. Yahoo Finance wrote at that time that, “With gasoline prices now up 20 consecutive days, the coverage and concern is reaching fever-pitch, turning us all into speculators of how high pump prices will rise." "We're probably not going to hit $5 a gallon," predicts Phil Flynn, FOX Business Network contributor and oil analyst at PFGBest. Flynn calmly says we're getting way ahead of ourselves with all this price per gallon talk, prior to couching his prediction in the necessary caveats about Iran, the Middle East and nuclear conflagration. Flynn points out that the overlooked factor in all this gas talk is the impact of U.S. refinery capacity. It's been more than a generation since a refinery was built in the United States. According to Flynn the remaining refiners are going into maintenance. "EPA regulations could close more (refiners)," he says, leading to a glut of crude oil, but a backup in domestic places to turn black gold into gasoline. Flynn also makes reference to the U.S. devaluing currency, a factor which is constantly putting upward pressure on every commodity extant. Ultimately, all oil conversations lead to Iran, of course. Flynn says he's seeing, "the biggest risk premium in the price of oil since 2008." By way of illustrating the skittish nature of markets, he attributes a New York Times article over the weekend suggesting Iran may not be on the path to nukes as the catalyst for oil's dip on Monday morning. To traders, most of this is just wildly unpleasant noise; what matters is the trade."
What if the worst doesn't happen. "If the worst case scenario doesn't happen we're going to have a bunch of oil sitting around in tankers that will put significant downward pressure on prices," he says. How significant? If Iran is resolved, we could see an unwind of $20 a gallon in the price of WTI crude (oil opened at $109.67 and closed at $108.56 on February 27) and gas prices at the pump under $3 a gallon.
Flynn sees the current crude price action as little more than a run-of-the-mill panic. We've seen these things before, he notes. When panic passes prices really fall.
I was happy to be on with Jeff again on Yahoo Finance on May 9, 2012 when they wrote, “As recently as last month, ever higher crude oil prices and $5 a gallon gas were still regarded as inevitable. Naturally, much of the blame was placed at the foot of speculators, or "gamblers," propping up the prices for their greedy and otherwise nefarious purposes. Since then, gas prices have dropped to levels much lower than they were a year ago and WTI has fallen off a cliff, falling over 10% in May alone. How could the speculators have allowed for such drop? Breakout asked Fox Business News contributor Phil Flynn, also a senior energy analyst at PFG Best.
"I'm shocked!" shouts Flynn from the floor of the CME. According to Flynn, most of the commodity funds (read: Speculators) were caught heavily long in oil when the market turned, causing them massive losses. "I'll tell you why: It's because they never controlled the price in the first place!"
Flynn takes the gamblers' reversal of fortune as, "more proof that whenever somebody blames the speculators for the prices [of energy], they really don't know what they're talking about." Assuming the speculators aren't about to get credit for any decline in crude prices, Flynn says the fundamentals are to blame for the recent sharp decline. Newly Socialist France and the lunacy in Greece are creating uncertainty that weakens demand. In combination with the glut of oil, stockpiled when a military stand-off with Iran seemed inevitable, the price of crude and other forms of energy are dropping due to the laws of economics. Unless Europe is "solved," which is unlikely if not impossible, or a hot war breaks out in the Middle East, Flynn says "sell the rallies" is the dominant strategy. To him the only real question is whether or not a trader should go so far as to short crude or natural gas. With the fast drop below $100 a barrel in WTI crude, Flynn says its new price range is likely to be somewhere between $90 and $95 a barrel, causing him to "be a little careful" going short. For every buyer there's a seller, meaning someone is most likely making money off the drop in energy prices. Whether it's a new breed of speculators driving it lower or the obviously bearish fundamentals is beside the point for a trade. Until further notice, the best way to play crude has gone from "buy the dips" to "sell the rips."
As recently as last Friday I told Tracy Burns and Ashley Webster on the Fox Business Network that oil had not bottomed and was probably on its way to $90. We are already close!