The day after a wildly bearish Energy Information Administration supply report showed that crude supplies are at the highest level for this time of year in 82 years, refinery runs are at a six-year high for this time of year showing refiners are ahead of schedule going into the summer driving season, central banks and economic data in U.S. piled on to one of the most significant sell-off events this year. First it was the bank of Japan that caused a run on the yen and a surge in the dollar by announcing an almost radical bond buying program that would double the amount of Japanese yen in circulation. The flight to the dollar was curtailed a bit by a level headed European Central Banker Mario Draghi who did not seem to get into a tit for tat with the Japanese central bank and resisted the urge to escalate the possibility of a currency war. Draghi suggested that despite recent weak economic data, the Eurozone economy would improve later this year reducing the chance for a ECB rate cut, giving the euro a boost and taking away some of the dollar panic buying.
Still the Japanese action overall was a pall hanging over the bulk of the commodities markets. The dollar and the U.S. Treasuries have regained their stature as the world's safe haven status perhaps for the first time since the early days of the financial crisis in October of 2007. This has come at the expense of the gold market, which had reclaimed its historic safe haven role during the crisis signaling that at least for now, the market believes that the United States economy is the safest in the world and the action on U.S. bonds has them acting like our debt is Triple A Rated. Don't tell that to S&P.
The downside of course is that our exports will be more expensive and we are seeing that play out in the grains and meat markets. Japan is a major importer of meats and grains and now ours are less competitive on the global market. For grain markets we have to add the worries surrounding bird flu and the fear that it could reduce Chinese demand for feed.
It could also hurt our manufacturing sector that was slowing in the last ISM report and reduce our demand for energy. So now the oil traders will look to today's jobs report to try to gauge their demand expectations.
The Energy Report has been beating the drum on natural gas and as Bloomberg News reports natural gas has been a top performer as gas gained 20% in the first quarter, the top performer on the Standard & Poor's GSCI index of 24 commodities, after showing the worst return a year earlier. Gas hasn't posted such a strong start to a year since 2008, when prices jumped 35% to $10.10 per million Btu after unusually cold weather depleted supplies
Even before the Energy Information Administration natural gas storage report, Bloomberg news wrote, "The U.S. may face the lowest natural gas supplies for the start of any heating season since 2008 this fall after cold weather drained stockpiles, sending prices up in the three months through March for the first time in five years.”
Bloomberg reasons that, "Gas for near-term delivery on the New York Mercantile Exchange climbed faster than supplies for later months, limiting the incentive to put the fuel into storage for use next winter. Buying gas based on May futures to sell in October earned 10.4 cents per million British thermal units at the end of March, down 77% from 44.3 cents for comparable contracts a year earlier, according to data compiled by Bloomberg. The narrower spread between spring and fall gas prices has reduced the incentive to store the fuel to meet demand next winter, when consumption peaks.” The spread between May and October contracts is the narrowest for this time of year since 2004. Storage companies and pipelines increase stockpiles during the warm-weather months to ensure adequate supplies to meet winter heating demand.”