Monday, April 4, 2011


Oil Hits 30-Month High on Demand Outlook, Jobs- Bloomberg
Oil climbed for a third day in New York as signs of a strengthening U.S. economy stoked bets fuel demand will rise in the world’s largest crude user.

Ignoring the fact that the "job creation" is phony AND the "strengthening economy" is all due to the Fed printing money [not organic growth] ...historically, rising gas prices have CUT demand for fuel. Oil is hitting these highs purely on inflation driven speculation and news out of the Middle-East...despite what the headlines say.

Schork Oil Outlook: Consumers' Appetite for Gasoline Is Falling
By: Stephen Schork, Editor, The Schork Report
Per last Wednesday’s weekly update from the DOE, the amount of gasoline supplied to the market fell by 2.3% to 8.87 MMbbl/d. The four-week average is approximately 9.03 MMbbl/d and has been trending lower over the last three reports.

Owing to student spring-break vacations as well as the Easter and Passover holidays, discretionary demand for gasoline typically picks up at this point in the season. This makes the recent pullback in consumption even more telling.

With demand suspect, what about supply? Total crude oil supplies in the United States, 355.7 MMbbls, are 4.2% above the upper limit of the 95% confidence interval (CI) of the mean from the previous ten years. Gasoline supplies, 217.0 MMbbls, which have had a precipitous fall over last month-and-a-half, remain near the upper limit, 218.3 MMbbls, of the 95% CI.

In spite of these metrics Wall Street shrugs. Per Friday’s update from the CFTC, money managers were sitting on net length of 61,253 contracts of RBOB and 38,624 contracts of heating oil.

Juxtapose this speculative length to DOE commercial stocks. At present there are 32.8 MMbbls of gasoline and 30.96 MMbbls of distillate fuels in PADD IB (inclusive of the Nymex delivery hub in New York Harbor). The upper limit of the 95% CI is 33.2 MMbbls for gasoline and 27.4 MMbbls for distillates.

As written in today’s issue of The Schork Report, demand for petroleum products is falling while supplies are near the upper limits of the historical range. More importantly, the current price path on the Nymex indicates that demand inelasticity for gasoline this summer will fall even further.

How long can Wall Street continue to ignore this fundamental?

So, let me get this straight.  There is plenty of Oil AND demand for gasoline is falling, but Bloomberg is telling us that Oil prices are at a two year high and rising because demand for oil and gasoline is on the rise.  Okey-Dokey.  And the weak US Dollar has nothing to do with the high Oil prices...

You can bet our overworked money printers at the Fed are on top of this current rise in the price of Oil.  As a matter of fact they are of the opinion that Oil is relatively cheap at current prices:

Tipping point for oil seen at $150 per barrel
By Patrice Hill, The Washington Times
March 08--A top Federal Reserve official on Monday said the central bank should react if oil prices soar as high as $150 a barrel because prices that high could throw the economy back into recession.

Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, for the first time Monday spelled out what level of oil prices might trigger Fed action, pinpointing the record level around $150 set in 2008. Many economists say those oil prices, along with $4-per-gallon gas, helped throw the economy into a recession.

"I think at the $120 range -- it's a manageable level," Mr. Lockhart told the National Association of Business Economists.

"Around $150 it becomes a much more serious concern," he said. "If it plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation."

Unless I misunderstand Fed Head Lockhart, or he was misquoted, he just said that if Oil got to $150 a barrel and threatened a recession, the Fed would respond with MORE accommodation?  Oil is at $108 a barrel now with too much accommodation already, and he stands ready to offer more if the price rises to $150 a barrel?  Obviously Mr Lockhart needs a primer on Inflation.

Oh, excuse me Mr Lockhart.  I missed your comments last week on Inflation Risks to the US Economy.  In a speech March 28 in Atlanta, Fed Head Lockhart had the following comments on Inflation Risks:

Inflation risk
I know inflation is on everyone's mind at the moment. It's worth taking some care to explain current circumstances as regards inflation. In the summer of last year, there were widespread signs of disinflation in price data and there was legitimate concern of a deflationary cycle becoming established. Financial markets had priced in more than a 30 percent chance of deflation over five years, about twice the probability indicated in the spring. That trend has been reversed in recent months.

Starting in the fall of last year and running through the most recent readings, prices have been firming, and this is bringing trend inflation closer to the desired levels for the longer term. By trend inflation I mean the average rate of inflation measured over a time frame long enough to allow the factoring out and dismissal of monthly noise and one-off signals in the data. Historically, food and energy prices have been volatile and not necessarily indicative of the broad inflation trend in a given period. Food and energy prices have been moving up strongly over the last few months. But broader measures of prices have been growing as well at a rate that would not be acceptable if sustained for very long. This price growth is largely attributable to increases in food and energy prices, but even so-called core measures of inflation rose at a higher-than-desirable pace in February.

For the time being, I think the risk of deflation has retreated. For a variety of reasons, many commodity-based prices have risen sharply. I expect these strongly accelerating upward movements of commodity prices to be short-lived, and, in fact, many of these prices have either moderated somewhat or leveled off in the past month. Nonetheless, in such circumstances, it's understandable to be somewhat apprehensive about the inflation climb path we're on, and whether or not it will level off.

In light of these developments, let me make three observations.

First, inflation pressures associated with rising commodity prices will dissipate if, as currently expected, the rate of growth in these prices slows. Let me emphasize that this is not a prediction that the prices of gasoline or groceries will actually fall. I'm distinguishing here between the rate of inflation and the level of prices. These higher costs are a result of real growth in emerging economies, developments in the Middle East and North Africa, and the fallout from natural disasters around the world, be they droughts, floods, or earthquakes and tsunamis. The pain of having to allocate a larger share of your income to driving your car or preparing dinner may well persist.

Second, contrary to popular opinion, Fed officials actually do eat and fill up their gas tanks. The FOMC's mandate, as I see it, is to control the inflation rate we all experience—so-called headline inflation. In other words, I interpret the Fed's price stability mandate as requiring the FOMC to manage the growth rate of the average of all prices, including food and energy.

Third, it's our job to control that headline inflation over the course of time. It's not feasible to exert such control day to day or month to month or even quarter to quarter. But monetary policy can control the rate of overall inflation over the medium term. In general operational terms, I think growth in overall consumer prices at an annual rate around 2 percent through a period shorter than the proverbial "long term," say, a medium-term period of three or four years, is consistent with the Fed's price stability mandate.

While short-term measures of inflation have accelerated in the last few months, I hold to the view that this trajectory will not continue. I continue to see the Federal Reserve's inflation objective I just outlined as attainable.

That said, like my colleagues on the FOMC, I continuously monitor performance against our price stability objective. This involves monitoring not just inflation today but importantly the course of inflation expectations, whether derived from surveys or pulled from financial market prices. I am prepared to support a change of policy if evidence accumulates that the low and stable inflation objective is at risk.

For now, however, I remain satisfied that the current stance of monetary policy is appropriately gauged for the current state of the economy and the outlook from here.

It would seem that Fed Head Lockhart not only accepts the risks of Inflation, but welcomes it.  He'll be a prized aquisition when the lynch mobs start roaming the streets of Washington in a couple of years.

It's almost worth the Great Depression, to learn how little our big men know.
-Will Rogers

Once again, Silver had the lead foot in the Precious Metals today.  Bursting through the $38 level today with reckless abandon as markets opened overseas last night and climbing steadily throughout the day on the CRIMEX.  Gold, though it broke through $1430, continued to perform as if were dragging an achor across a rising tide of fiat currency.

Volume in Silver has been relatively light of late.  The signs of a short squeeze feeding on itself becoming evident.  It is unlikely any buyers of size are entering Silver at this level.  It is equally unlikely that any shorts in size are not going to cover way up here.  The little guy that recognizes a potential near-term top in Silver is getting chewed up because it's a bit too hot in this kitchen.

Silver is overbought, and bullish sentiment is off the charts.  These are indeed dangerous times to be short, OR long, the ever volatile Silver market.  Gold is the much less risky bet right now.  I love Silver, but not right here, and not at this price.  Silver is 49% above it's 200-Day moving average right here and now.  Gold is a mere 8% above it's own 200-Day moving average.  Silver stocks at the CRIMEX have risen by 3.8 MILLION ounces since March 11, and backwardation in the Silver futures has disappeared out to December 2011.  I hate to say it, but Silver looks like an accident waiting to happen up here.

Consider also Silvers seasonality.  In this bull market to date, over the past 10 years, Silver usually finds an interim top in early April following it's annual bull run from mid-December through March.  This annual interim top in April sets up the annual May rally in Silver.  May has been Silver's 4th most bullish month of the year during it's ten year bull market to date.  A pause in Silver's rise here would be beneficial to all traders going forward.

Adam Hamilton opens the door to Silver's seasonality in his essay Silver Bull Seasonals, and he cautions as to it's usefullness and interpretations:

In every market including silver, when prices surge too far too fast they simply need to correct. This is a psychological phenomenon, supply-demand fundamentals are completely irrelevant. Any price rising too far too fast generates tremendous greed. This unbalanced sentiment sucks in all traders interested in buying in anytime soon. Once all these buyers have bought, only sellers remain. And then some minor catalyst ignites initial selling pressure which quickly snowballs, resulting in a full-blown correction.

Like gold, silver tends to rally strongly in January and February. But while gold retreats modestly in March, silver simply consolidates high. Spring is always an exciting time of the year for speculators, and optimism grows with the lengthening daylight and warming temperatures. Maybe this helps explain silver’s March resiliency relative to gold, and maybe not. But it definitely exists statistically regardless of the reason.

In April and May gold starts rallying again, but in its weakest big seasonal rally of the year. Silver initially leaps up much more quickly than gold in early April, but by the middle of the month the probability of silver selling grows.

While silver bull seasonals are interesting, and useful, a huge caveat applies as in all seasonal analysis. Seasonals are merely secondary drivers of prices, tailwinds or headwinds. Far more important for silver’s near-term fortunes at any time are its prevailing technical and sentiment situation. If silver is seriously overbought, and greed reigns supreme, it is likely due for an imminent correction no matter how bullish its seasonals happen to be. And if it is deeply oversold and drenched in fear, it will probably rally sharply no matter how bearish its seasonals are.

So don’t overestimate the importance of seasonals in your own trading. Look to technicals and sentiment first, and only then consider whether seasonals are likely to amplify or retard the prevailing short-term trend. Profitable trading requires investors and speculators to carefully consider and process a broad array of often-conflicting information before determining the highest-probability-for-success course of action. Within this weighing, seasonal influences cannot override significant technical and sentiment levels.

Is Silver going to correct from up here?  I'd be foolish to say yes, and ignorant to say no.  But the current technicals and overly bullish sentiment are supportive of an interim top near here when confronted with the headwinds of Silver's April seasonality.  And bear in mind, a correction does not neccessarily mean a dramatic fall in price.  A correction could merely be a "period of consolidation". 

Caution is my outlook for the near-term in Silver.  If Silver is going to $50 or $100, a little caution at $38 will be consider cheap in the long run, and a wise investment if sale prices present themselves later this month.  Silver is in the midst of yet another short squeeze, not unlike the squeeze we saw in December.  The last place you want to find youself as a trader is buying a market as the last short is wrung out.

With respect to the floundering US Dollar.  We must remain open to the "possibility" of a rally in the US Dollar in the near term.  The odds of QE2 wrapping up at the end of June are increasing.  The Japanese central bank is determined to see the Yen lower.  The value of an interest rate increase in Euroland is already priced into that market.  The Fed is caught between a rock and a hard place.  End their QE program and the stock market and the economy roll over.  Continue the QE program and the US Dollar plummets and takes the bond market with it driving interest rates to the Moon.  The Fed and the World cannot afford to see the Dollar collapse and implode the bond market at this time.  The stock and commodity markets must be sacrificed at this point so that the Fed might be asked for QE3 in the Fall of this year.  And let's not dismiss our fearless leaders run for re-election...a weak Dollar would not be very supportive of a $1 BILLION re-election campaign.

Friday's Jobs Report and Its Effect on the USD:
By Cliff Wachtel
The US monthly non farms payrolls and unemployment rate report our Friday morning EST was an unqualified victory for QE, the USD, and risk appetite. Not only were expectations beaten, the improvement was widespread in the detail as well as the headline figure, and occurs within the context of an already bottoming USD.

USD Rate Increase Expectations Revised Higher

In recent weeks, there has been growing support within the Federal Reserve to start withdrawing stimulus and the latest NFP report only reinforces the arguments favoring tighter monetary policy, even from the more dovish (anti-rate increase) members like Bullard.

Why? Continued evidence of recovery, a weak dollar, and high commodity prices have made central bank officials both more optimistic about U.S. growth and also more concerned about inflation and asset bubbles.

The key takeaway from Friday’s US jobs report is that the labor market is improving and as a result:

The Federal Reserve will most likely not continue asset purchases beyond June.
Markets must revise their expectations higher for USD rate increases, because jobs and spending data are the 2 key metrics the Fed is using for deciding the extent and pace of stimulus exit and tightening.
The USD is more likely than ever to start rallying.

While the EUR is expected to be raising rates within the coming week, much of that increase is already priced into the EUR. It’s the USD that now has the bullish surprise and new fundamentals on its side.

The JPY repatriation story is fading, so is that of GBP rate increases as both Japan and the UK face new economic challenges, while the US outlook is improving

The Bears side of the US Dollar boat is getting pretty full.  The Bulls side of the boat in Silver is pretty full also. Tippy, tippy....


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