The oil market got heavy as word of a possible story of a Fed exit, which started to permeate the trading floor on Friday. And sure enough the Wall Street Journal soon published an article by Jon Hilsenrath that said "Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations. Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated. "
Of course for oil that can have major implications. I wrote the day after QE1 that you can't fight the Fed, and that the Fed just printed a floor under commodities. I went as far as writing a song back in 2009 — "I fought the Fed and the Fed won.” What is that they say about never fighting the Fed? Well at the very least do not underestimate the way this Fed can change the marketplace. The Fed’s timing of this move to quantitative easing still has the market coming to grips with the shorter and longer term effects on the economy and the markets.
Of course at that time I was met with a lot resistance to this concept. In fact one news article took me to task. They blamed the speculators and thought my quantitative easing argument was hog-wash. Yet of course now everyone realizes the impact that QE has had on the price of commodities and the prospects of oil. In fact even those that at the time denied the impact now have to admit the power that the Federal Reserve has. The Fed with its power to flood the market with money to try to avoid deflation has changed the value and how we perceive the price of oil.
Economic data now has to be taken in the context of how it might impact Fed policy and that is why it is so important to read the Fed tea leaves. At the same time you have to look at the impact of supply and demand as well. News that OPEC raised production was another negative factor in the market. The huge sell-off in the market was met with a rebound as traders felt that perhaps they priced in too much bearishness too soon.
The other issue is oil going down to the Gulf Coast and whether our production boom will overwhelm the refineries. Robert Campbell writes "A recurrent assumption made by many oil analysts when trying to figure out the courses of the U.S. shale oil revolution has been that the rising torrent of crude will eventually flood the market along the Gulf Coast.” Yet so far this has not happened. Cash crudes on the Gulf Coast have lost some ground against global oil benchmarks over the last four months but are hardly in crisis territory. What has happened is that high-cost imported crudes are being squeezed out of the U.S. market. Those barrels still finding homes in key markets are largely characterized by being exceptionally heavy grades of crude or oil from the Middle East that is being competitively priced to ensure producers from that region hold on to market share.
That's all fine, skeptics might say, but can it last? A look at Houston, Texas, the area of the Gulf Coast receiving the vast majority of the new inland crude oil supplies, suggests there is plenty of scope yet to absorb more light crude. Foreign crude imports into Houston fell by 472,000 barrels per day in February, the most recent data currently available, when compared with the fourth quarter of 2012. But even so this meant that Houston-area refineries were still buying 910,000 bpd of foreign oil that month. With a weighted average API gravity of 29.4 degrees, this oil was, in aggregate, a medium crude. Thus there is considerable room still for medium crude in the Houston area to be displaced by blends of domestic light and foreign heavy oil. Drilling down more deeply into the data, the picture is a bit less rosy. It seems unlikely Canadian or Mexican heavy crude will be displaced by domestic light oil so those barrels should be excluded.
And it makes sense to also exclude Saudi Arabian crude oil given the Kingdom's apparent willingness to sacrifice some revenue to maintain market share in the United States for diplomatic purposes. That reduces the volume of foreign oil that will be relatively easy for domestic producers to displace from the Houston region to approximately 449,000 bpd in February, down from 863,000 bpd in the fourth quarter of 2012.”
Dan Murtaugh of Bloomberg writes that "U.S. oil exports are poised to reach the highest level in 28 years as deliveries to Canada more than triple, helping bring down the price of the global benchmark Brent crude relative to U.S. grades. The shipments will rise to at least 200,000 barrels a day by the end of the year, according to Ed Morse, head of global commodities research at Citigroup Global Markets Inc. Exports were 59,600 in 2012 and haven't averaged more than 200,000 since 1985. The U.S. restricts companies from sending American crude abroad, with Canada an exception. The premium for Brent, used to price European and West African crude, over U.S. West Texas Intermediate narrowed to less than $8 a barrel this week from $25.53 in November. The export increase allows refiners in eastern Canada including Valero Energy Corp. and Irving Oil Corp. to replace cargoes from overseas with less-expensive U.S. oil, benefiting from the shale-drilling boom that's pushed domestic output to the highest level since 1992.”
Yet natural gas seemed to move inversely in a small way adding more evidence that natural gas may act as a safe haven to oil. Dow Jones reports that Shanghai copper futures settle 0.7% higher on modestly encouraging China economic data. Value-added industrial output in China rises 9.3% in April on year, accelerating from an 8.9% on-year increase in March, government data shows Monday. Retail sales in China rise 12.8% on earlier, also accelerating slightly from a 12.6% increase in March. The benchmark September copper contract gains CNY360 to settle at CNY53,360/ton; aluminum, zinc and lead settle mixed.