This has been a very exciting week, too bad it’s ending.
Will there be hell to pay for this week’s party, or are we back to 1999 party mode as the market tosses off bad news and plows ahead, regardless of all obstacles? You can’t fight the bulls, you can only run with them while it lasts and hope you don’t get trampled or gored at the end!
The oil bulls are on the march today after the Senate gave the market a scare by attaching greater oversight of the energy markets to the Farm bill, meaning the end is much closer than they thought. This sent oil down $4.50 a barrel in one hour on the NYMEX, which was really clearing out the suckers because the bill hasn’t passed yet and they manipulated the price right back over $125 at the close and have run oil back over $126 again in overnight trading. The crux of the legislation is aimed at closing what is known as the "Enron Loophole." This is legislation that was passed by Bush, whose campaign was financed by Enron who also supported the Taliban in Afghanistan, funneling hundreds of millions of dollars to the people who were supporting Bin Laden pre-9/11.
In 2000, at the urging of Enron and other large energy traders, a provision was slipped into an omnibus bill conference report that eliminated CFTC oversight of energy commodities traded by large companies outside of the regulated exchanges. This so-called Enron loophole has severely restricted CFTC oversight of energy trading.
Until laws were relaxed, ALL energy trading took place on the regulated NYMEX. In the late 1990s, Enron began to change all that by developing a way for companies to trade energy futures electronically, using computer software that operated outside of the regulated exchange markets – so-called “over-the-counter” trading.
Enron later collapsed, but the concept it pioneered of electronic over-the-counter trading, outside of the regulated markets, took off. In 2000, a group of oil companies and financial institutions, including BP (BP), Amoco, Shell Oil (RDS.A), Totalfina Elf oil company, Deutsche Bank (DB), SG Investment Bank, Goldman Sachs (GS) and Dean Witter, founded a company in Atlanta, Georgia called the Intercontinental Exchange, or “ICE.” ICE specialized in electronic over-the-counter trading of U.S. energy commodities. In 2001, ICE expanded its operations by purchasing the leading European exchange for trading European crude oil and heating oil futures, the London-based International Petroleum Exchange. ICE renamed it “ICE Futures” and, last year, converted it into an exchange that does all its trading electronically AND UNREGULATED.
Many analysts believe this souped-up trading activity has pushed up oil prices by $20 — $25 per barrel. It’s why we have $120 per barrel oil instead of $90. As Tim Evans, an industry analyst, put it: “What you have on the financial side is a bunch of money being thrown at the energy futures market. It’s just pulling in more and more cash. That’s the side of the market where we have runaway demand, not on the physical side.”
"We’re putting the cop back on the beat, and it’s long overdue," co-sponsor Sen. Carl Levin said as the Senate voted on the bill. Under the measure, the Commodity Futures Trading Commission will consider trading volumes and whether contracts are being used to establish a price reference for other contracts. The language is largely similar to recommendations made by the CFTC in a review of what extra regulation the agency thought was necessary. The provision also requires traders to maintain audit trails by supplying reports on any large trades to the CFTC, imposes record-keeping requirements, and forces electronic exchanges to monitor trading behavior and prevent manipulation.
This law has been over 18 months in the making so don’t expect great things overnight. Bush spend his entire first year in office removing the regulations (per Enron’s "suggestions") and it took all the way to 2004 before the mission was accomplished as the invasion of Iraq broke the $35 per barrel mark for the first time and over $60Bn of speculative money poured into the now International energy exchange and the establishment of tens of billions of additional ETFs to trade oil allowed another $40Bn worth of oil to be bought up by speculators. $100Bn is about 1 Billion barrels, more than the entire US Strategic Petroleum Reserve, that has been taken off the market by speculators. During this time, Bush also spent $19Bn of our money to fill the SPR with an additional 250M barrels - BUT, he was not alone!
In March 2001, the IEA made an agreement that all 26 members must have a strategic petroleum reserve equal to 90 days of oil imports that caused member countries to raise oil stocks from 2.7Bn barrels to 3.8Bn barrels, which are currently in reserve. During this time China built up a reserve of 200M barrels as well. India, Japan and Russia also established reserves this decade which, combined with the speculators, have taken over 2.5Bn barrels off the market - the equivalent of and entire month’s worth of Global consumption.
Interestingly, it is only as these reserves are filling up to capacity (the US SPR has just 29M barrels of space left) and after OPEC has cut 3M barrels a day of production and commercial inventories are approaching 5-year highs, that the general public is being told by Goldman Sachs and others that oil will be heading MUCH higher. This is so similar to the top of the housing bubble it amazes me that the talking heads on CNBC don’t mix up their lines when they are telling their listeners to BUYBUYBUY.
President Bush made XOM nervous by asking the Saudis to put more oil on the market this morning, and "the U.S. leader got a chilly response to his plea." It must be important to Bush because he is spending a whole day there! The Senate Democrats, who were concerned that a day trip may not do the trick, introduced a resolution that would block $1.4 billion in arms sales to Saudi Arabia unless Riyadh agrees to increase its oil production by one million barrels per day.
Exxon Mobil (XOM) CEO Rex Tillerson, said he finds it "astonishing" that President Bush is asking Saudi Arabia to pump more oil rather than working harder to clear the way for more oil production at home. XOM’s interest is to have us focus on ANWAR (7 years from production) or offshore drilling (5 years from production) rather than do something NOW about prices - that wins Rex our self-serving, nation-destroying bastard of the week award - Congratulations Rex, you (expletive deleted)!
Speaking of expletives deleted, our pals at GS decided today would be a good day to raise their forecast for 2008 oil to $141 a barrel for the second half of the year, up 30% from the previous forecast of $107. They predict 2009 will hold at a steady $148 a barrel. The near-term oil market is being driven by “long-dated’‘ prices, or the price of oil for delivery 5 years forward, Goldman said. While an increase in U.S. stockpiles and declining demand growth due to the global economic slowdown is creating “near-term fundamental weakness,” this is not causing lower prices, according to the bank. “We do not expect these softer fundamentals to translate into spot price weakness given the strength in long-term prices,” according to the report. “We expect the bullish structural market to dominate the bearish cyclical weakness.”
In other words "We don’t care if there is no actual demand for the oil, we’re still going to drive prices to the moon!"
As oil hit $127 in after hours trading, China had some aftershocks and Asian markets ended fairly flat despite some better than expected economic growth out of Japan. Paulson’s Treasury has decided against designating China as a currency manipulator, bucking Congressional pressure to act against China’s currency manipulation and Chinese steelmakers are considering a boycott of Rio Tinto (RTP) who they say are manipulating the iron-ore markets. (this would be funny if it wasn’t so tragic).
Europe is up about a point on strong earnings from British Airways (BAIRY.PK) and news that British Energy [LSE:BGY] may be selling their nuclear power unit for $20Bn. The construction sector picked up and the banks stopped falling down as Barclays (BCS) showed a profit despite $3.3Bn in write-down, all good things!
In addition to $127 oil (and I did say at the beginning of the week they were going for $130, which is my top call) rallying the energy sector, we got a better than expected housing report and we will see if our markets can keep it together for the day. Of course 13,000 is a must hold for the Dow and we want to see the S&P stay above 1,425. As I said yesterday, I’m not going to be bullish until we hold these levels through next Wednesday.
Until then, be careful out there and have a great weekend!
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This article has 24 comments:
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PokerDonkey
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28 Comments
May 16 10:18 AM-
zenalgorithm
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158 Comments
May 16 10:23 AM12 million+ barrel inventory increase in the last 3 weeks because of $4/gallon gas...
Goldman Sachs is begging us to buy their oil futures...
TA charts suggest downward to $110, maybe $100 within the next 2-3 weeks.
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JREwing
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146 Comments
May 16 10:37 AM-
JREwing
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146 Comments
May 16 11:06 AM- World economy seems to be fine.
- Baltic dry made a new high today (Looks like there is actual demand for
commodities)
- Light sweet crude inventories are low
- No one gives a damn about oranges (other grades), when you trade
apples (light sweet crude)
- A lack of exploration in North America (unlike some folks think, crude
doesn't come out of holding tanks)
- Worldwide distillate inventories are low, demand is high
- Looks like the Condo market in South Florida does not change the
gravitational constant of the universe.
- Even Germany's growth picked up (They are usually the last)
- BRIC nations don't build roads for bicycle traffic
Why would oil not be where it is?
Because some half ass muffin boy of a senator says so?
It is always the same socialist song:
"If it moves, tax it. If it keeps movin', regulate it. If it stops movin' subsidize it".
That is the translation for farm bill.
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JREwing
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146 Comments
May 16 11:34 AMDon't you get it?
NO ONE NEEDS MORE SOUR CRUDE FROM SAUDI ARABIA RIGHT NOW!
IT IS THE SWEET STUFF. OK?
IT MAY BE THAT YOU DON'T KNOW CRAP ABOUT OIL, BUT DO YOU REALLY HAVE TO CALL OTHER PEOPLE NAMES?
WHERE IS THE SWEET CRUDE SUPPOSED TO COME FROM, IF NOT FROM ALASKA, NIGERIA, MEXICO'S CANTAREL?
Oh guess what Alaska's Prudhoe Bay has peaked, Mexico's Cantarel has peaked, Nigeria is a constant problem. Just in case you believe in oil sands. That stuff has a horrible quality.
Again, where is the sweet stuff supposed to come from? For a change good old T-Rex Tillerson is right. Everybody complains about the trade deficit and you want more imported oil?? And at the same time people like you complain about the falling dollar. Congratyourfreakinlati... A stunning piece of detective work, Commander Bond.
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aquaculture
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111 Comments
May 16 12:32 PM-
cdcaddy
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17 Comments
May 16 12:55 PMfootnote to our politician's overall stupidity. The only way oil is ever going to come back down is with the global economies of the world using less fossil fuel and more alternative energy - who cares what we do - as the US slows, the BRIC is picking up [although you have to give Brazil a lot of credit for their cane based ethanol program]
Until we get our heads out of our congressional a** we're in for oil prices over $100 a barrel and then some...
PS - the way we getting screwed by our own congess - the American public is that "half a**ed muffin boy"
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JREwing
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146 Comments
May 16 02:26 PM-
CarlosSlim
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120 Comments
My Website
May 16 02:29 PM-
HCSKnight
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3 Comments
May 16 04:37 PMRegarding the following from today's blog post; "Enron who also supported the Taliban in Afghanistan".
You can not be serious. Your reference source is a Bahamian news paper, "The Punch", and it's quoting "secretly employed CIA agents"....
I read no further. You may have some good ideas but your credibility is less than zero. Why read any further.
Cordially,
HCSKnight
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Philip Davis
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345 Comments
My Website
May 16 09:13 PMThere's actually 132,000 references in Google to Enron Taliban and I just grabbed the first one that summed up the story. Had I known my source was being graded I would have checked with you first.
Yes we have been shorting oil and losing money for years but we also have shorted oil and made spectacular amounts of money as well. The nice thing about shorting oil is the periodic sell-offs that work great for options traders. While we lose $1 here and there shorting XOM at the tops, when it drops $15 (as it did 3 times in the past year) we can make 10X our investment. As a short to hold, oil stocks would be a tough game but as option trades, they are cash machines. Just yesterday XOM gave us an intraday double, then it went up and now we are short the June $95 puts at a basis of $4.30 (we took a loss on the roll up from lower calls). Feel free to sell some of those puts and we'll see who has more money at the end of next week!
Nice article that says 3/4 of US refining capacity can handle sour crude: peakoildebunked.blogsp...
Also, no one is saying we shouldn't open up to more drilling but certainly you can't believe that asking the Saudis to pump more oil is a bad idea. We need the oil now. Meanwhile, here are some interesting maps showing you how much oil is not being drilled in Iraq and Saudi Arabia - why can't we get some drilling done there, on land, where it's quick and cheap to deveolp???
peakoildebunked.blogsp...
I will also say that simply taking away JR's Hummer (because you know he's the type) and regulating a minimum fleet average mpg of 35 vs. the 20 we have now and the 25 we are "hoping" to attain in 7 years would cut 7Mb per day in US fuel consumption once our existing fleet rolls over (7 years). That's a 33% reduction in oil consumption over 7 years at a rate of 1Mb/day per year cumulative.
That's 7 ANWARS worth of fuel per year once we get that job done. Does it sound impossible? Europe has that standard now. Who is the number one auto dealer in Europe? Ford. Number 2? GM... The same exact companies that sell us high-margin gas guzzlers here, sell the Europeans lower-margin fuel efficient vehicles over there BECAUSE they are regulated.
There's no profit in conservation - that's why certain parties fight against it tooth and nail!
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bm1087
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20 Comments
May 16 11:29 PM-
JREwing
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146 Comments
May 17 03:04 AM1. You're some conspiracy weirdo. I bet Enron is responsible for the Kennedy assassination as well.
2. If the overwhelming majority of the US refining sector can process sour crude, why don't they, it is cheaper. I guess that's why Barron's said, that Valero is the only refiner worth buying, because they are capable of processing sour crude. (Still I wouldn't buy Valero) Your numbers are wrong Mr Bond.
3. Drilling in Iraq and Saudi Arabia is cheap?? How ignorant are you? Drilling in Iraq is obviously expensive, because you have to pay for 150.000 Army men, who protect your butt Roughneck Davis.
Drilling in Saudi Arabia is expensive, because the Easy-to-extract-oil is gone. For the new field they open up, they have to inject 2 barrels of seawater(after they pumped it across the desert) in order to extract 1 barrel of oil.
4. I don't drive a Hummer, i drive a Grand Cherokee with a nice Mercedes Diesel (cutting my consumption in half compared to the HEMI)
5. Is it the oil industry who is responsible for conservation? As long as there are idiots drag racing towards red lights, gas is not expensive.
And, no offense Commander Bond, but if you really were such a killer, why do have to run a options-trading-teachi... site. If you were any good, you would make a fortune and give a rat's ass about others makin' a killin'.
I write a couple of comments here, because I want to brush up my English, you obviously need to advertise for your site.
To sum up: You don't know noting about oil, the source of your numbers and facts are dubious at best and logic seems not to be your strong side.
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bearfund
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544 Comments
May 17 12:40 PMIn other words "We don’t care if there is no actual demand for the oil, we’re still going to drive prices to the moon!"
Then later, in a response, you write:
Also, no one is saying we shouldn't open up to more drilling but certainly you can't believe that asking the Saudis to pump more oil is a bad idea. We need the oil now.
Let's see, there's no demand (high prices are caused by speculators, not supply and demand) but we are desperate for oil. Which is it, then? I guess you mean what people usually mean, that Americans are desperate for *cheap* oil, because they are wasteful and inefficient and never learned their lessons from the last 3 times this happened. Begging the Arabs, drilling in Alaska, and upgrading refineries are all temporary solutions to a permanent problem. The solution is to consume less, period.
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chinooking
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64 Comments
May 17 01:51 PM-
bill d
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193 Comments
May 17 07:36 PMGo somewhere else to brush up your English.
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Simont
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2 Comments
May 18 01:02 AM-
jjason
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408 Comments
May 18 09:33 AMScrew Big Oil, OPEC and speculators. I hope you speculators lose a lot of money.
I am angry as hell and I am doing something about it. I have told my Congressman that I approve of the legislation to destroy the big oil companies and OPEC. I do not buy any futures contracts for anything. If everybody gets out of this futures game then the game will be over. And in the zero sum zero world there will be some winners and some losers.
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PAULWOT
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5 Comments
May 18 06:41 PM-
Philip Davis
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345 Comments
My Website
May 18 07:08 PMAs to ignorance - Oil, on a global average, cost $40 a barrel to produce. Oil in the Middle east, cost $24 a barrel to produce, all of the rest is mark-up paid by enablers like you who have the very sick attitude that if someone "were any good, you would make a fortune and give a rat's ass about others makin' a killin'."
I'll tell you that it's comments like that which remind me why I do prefer to spend my time trying to make a difference in the world rather than whatever the heck it is you think you're doing supporting this BS.
As to the sweet/sour crude issue, I'd post more links but you don't seem to read the ones I've posted that already refute your statements so what is the point. Obviously, if there were really a long-term supply issue in WTIC (which is sweet crute) then refiners would be doing conversions to make the additional $20 per barrel on the spread but they, like you, know the whole scam is a house of cards that is ready to collapse and only throwing out red herrings like "sour crude refining capacity" can help you justify your position to others at this point.
Like Jjason - I'm as angry as hell and I am doing something about it, we're supporting our Senators and Congressmen and sending them the information they need to take control of this situation. We are doing what we can to make our side aware of all the facts and we are going to push for legislation to change this game.
Last week was just a start, there are proposals coming down the pike that will knock your socks off as the pendulum swings way back on this one.
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superfec
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2 Comments
May 19 04:23 AM-
Philip Davis
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345 Comments
My Website
May 19 05:43 PMthefraserdomain.typepa...
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rjay15
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1 Comment
May 19 11:57 PM-
Brandon W.
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1 Comment
May 20 09:39 AMKudos for pointing out, with hard data (and historical references), that de-reg isn't always the way to go (which is apparent with the power and utilities industry), and we can thank that attitude for our ridiculously over-priced fuels.
I find it highly interesting that, despite the "laws of supply and demand", with inventories at an all-time high, big oil is still making a "cool" $4 billion a year (sometimes more, depending on the company), and tells us that our consumption is to blame. Right. That's like Starbucks saying that they'll have to charge more for coffee because it's becoming more popular, despite the fact that technology has made it possible for coffee to be made from just about anything composed of beans.