Oil balances growing China economy with lower price projections

Let’s Party like Its 15000 DOW

Pull out the party hats! Dow closed above 15000 for the first time in history! The never ending rally has not disappointed, but is the party over? Although the Dow is rocking, and that has been a factor in the increase in oil from the lows, Dow records are just not what they used to be.

The problem is that the Dow is rallying not so much because business is that great but because it is being stimulated by the greatest economic stimulus in the history of the globe. While Dow 15000 is good news in any shape because it is better than Dow 12000, at the same time it also represents some smoke and mirrors and real money has been devalued by the Fed.

Mark Hulbert of MarketWatch using data provided by Mark Shiller points out that in inflation adjusted terms The S&P hit its all-time high in early 2000, at the top of the internet bubble. If we were to denominate that index's level in today's dollars, the S&P before the bubble burst would have been above 2,000 —24% higher than where it stands today. He says to be to be sure, dividends soften this blow — but only partially. Even with dividends re-invested, the inflation-adjusted S&P 500 index today is below its early-2000 peak.

Take oil for example. U.S. oil supplies are at an 82 year high and OPEC is raising production into a currently well to oversupplied market! OPEC boosted oil production to 30.21 million barrels a day in April, its highest output since November, the U.S. government said.  What is wrong with this picture?

Oil too has been supported by global central bank easing and stimulus, which tries its best to keep the global economy from sinking back into a deflationary depression.  With many counties insolvent the only way to keep the market from falling apart is to keep interest rates negative, flood the global banks with liquidity and pray that they have the guts to lend someone some money.  And in spite of this stock market optimism the Energy Information Administration is lowering their outlook for global oil demand. This comes the day before China surprised with export data that seems to be a bit beyond belief. The Financial Times reported that China exports  increased 14.7% in April from a year earlier, speeding up from a 10% pace in March and topping most forecasts. Imports rose 16.8% in April from a year earlier, up from a 14.1% rise in March and also surpassing expectations. That left China with an $18.2bn surplus on the month, rebounding from a slight deficit in March.

Of course there are doubts as data from surrounding nations don't quite measure up to China's lofty numbers. Nor does the Energy Information Administration Outlook lowering its crude price projection 2013 because of falling futures and increasing production outside of OPEC, like the good old U.S.A.

Falling crude oil prices contributed to a decline in the U.S. regular gasoline retail price from a year-to-date high of $3.78 per gallon on Feb. 25 to $3.52 per gallon on April 29. EIA expects the regular gasoline price will average $3.53 per gallon over the summer (April through September), down $0.10 per gallon from last month's STEO. The annual average regular gasoline retail price is projected to decline from $3.63 per gallon in 2012 to $3.50 per gallon in 2013 and to $3.39 per gallon in 2014. Energy price forecasts are highly uncertain, and the current values of futures and options contracts suggest that prices could differ significantly from the projected levels.  They say that after increasing to $119 per barrel in early February 2013, the Brent crude oil spot price fell to a low of $97 per barrel in mid-April 2013 and then recovered to $105 per barrel on May 3. EIA expects that the Brent crude oil spot price will average $104 per barrel over the second half of 2013 and $101 per barrel in 2014. The projected discount of West Texas Intermediate (WTI) crude oil to Brent, which increased to a monthly average of more than $20 per barrel in February 2013, fell to below $9 per barrel in April. EIA expects the discount to increase in the near term and average $13 per barrel in 2013 and $9 per barrel in 2014.

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