Can The Oval Office Push Oil Prices Down?

The simple answer is, "Yes," at least down to supply/demand levels of about $75/barrel, give or take $5.

The "How" is to reverse a major policy change made by the CFTC in 1991. At that time, the powers that be decided to allow banks the status of "hedger" in the crude oil market. A "hedger" is, at least in the usual sense, one who produces or uses crude. Using crude here would mean a refinery.

The banks persuaded someone in the G.H.W. Bush administration that since their clients might want to use the Over The Counter market, unregulated and opaque creature that it is, to buy or sell crude, that the banks should be allowed to finance those transactions, which they could do only if they, the banks, could hold positions in the transparent, regulated futures markets in excess of the normal 2,000 contract limit. And now they can.

As my earlier post shows, nearly half of all long positions are held by large hedge funds. Nearly three-fourths of those positions are held using the large bank's ability to circumvent contract limits in the futures market.

I trust it is now obvious how the white house can bring down crude prices: instruct the CFTC that it WILL, on pain of instant dismissal, reverse the foolish position that it took, or was coerced into taking (I have no idea what brought about the change) in 1991. Banks should be given five (5) days to unwind their positions down to the limit of 2,000 contracts that non-hedgers have. Should they not be in compliance, fines would commence a $1 million for the first day of non-compliance, and double each day thereafter, including week-ends. Less than one month of non-compliance would be needed to give the bank to the government.

Crude prices would drop sharply, quickly and without the politics of removing unneeded tax subsidies given to big oil. 

Day Trading Eur/USD May 2-3

Euro - USD May 2-3

This trade is a simple wedge break-out. The wedge or triangle extends until about 1330 GMT when prices move up. Directly above the green arrow you will see traditional estimates of the distance the trade can be expected to travel. The red line is 100% of the wedge, and the blue line is 160%. One reasonable way to trade this is to exit in the sideways motion near the 100% target. Another approach might be to take profits on part of the position, hold the rest. Or one might re-enter when prices move back up above the moving linear regression line. Note that the bull-power/bear-power indicator moves to even during the sideways phase, and the %b drops to the mid-point line.

Day trading the Forex GBP-USD Pair May 2-3

GBP May2 -3

This is my day-trading chart for the Forex pair British Pounds/ USD. Today, there were two opportunities. The large swing came in the Asian - European sessions around 600 GMT.

The important items to notice are (1) prices moved below the prior daily low, the brown line at the top, rallied back to that area and started down. The ovals at this point depict the rally high along with the bull-power line, the green line in the first inset below the chart, falling into the middle of the inset, while bear-power has risen to similar levels. That is bearish. The adjacent rectangle shows prices rallying back to the moving linear regression line while %b, the lower inset, falls. That is also bearish. Sell on a lower low and hold on. There is no reason to hold beyond 1030 GMT: prices have gone above and stayed above the LR line, and they are going firmly sideways.

The next opportunity for profit comes in the US trading session at about 1800 GMT. Prices have moved back under the LR line, bull-power has receded while bear-power has risen, and the %b has drizzled down to mid-chart. Selling the new low works well, though not nearly so well as the first trade. 

Rest Period for Stocks?

The morning reports showed nothing unusual, and there were no earnings reports that got the market excited. As a consequence, the Dow is off about 20 and the S&P down about 6, making this a meander with slight downward bias. Bonds were up a bit over-night. They sold off on the news that the economy wasn't terrible, but recovered. The big deal so far is that crude is down $1.50. Grains are also down noticeably and seasonably, as farmers put new crops into the ground.

Waiting?

Bonds didn't go far today, and equities were even more restrained. Crude couldn't do much, either. This all after the Asian session, which was the only session trading when the announcement about bin Laden was made, bid DJIA futures up 100 and crude down over $1 per barrel.

Evidently, bin Laden wasn't such a big deal after all, at least not on Wall Street. Perhaps this week jobs numbers will get the traders off the fence.

One Down, One To Go

President Obama scored a major political victory yesterday. The death of Osama bin Laden, the terrorist genius that Bill Clinton lacked the courage to have killed and who was too clever for George W. Bush and crew, insulates the president against the usual Republican baloney about Dems being soft on defense. I say baloney because our entry into World War One and World War Two was under Democratic presidents. Our wars against Chinese Communism, however foolish the war in Viet Nam was, were conducted under Democratic administrations. When it comes to leadership in war, the Republicans are, in the words of Geo. W. Bush, "All hat, no cattle."

President Obama still has the economy to deal with, no small matter. Reducing the price of gasoline, which the pundits claim the White House can't accomplish, would help a lot in persuading the public to re-elect Obama. How can the Oval Office bring down oil/gasoline prices? Stay tuned.

30 April CoT & Price Action for Grains

Wheat CoT shows small specs & farmers released a few of their shorts, commercials increased their shorts though small specs still hold twice as many shorts as the commercials. The funds increased their longs somewhat. On a price-action basis, the short term future is unclear. Friday’s action was a strong rally from short-term support. The mid-weed selling was from a slightly higher swing high. If I had to guess long or short on just that basis, I suppose I’d guess long.  I’m still of the opinion that sideways to down it likely for the next few weeks or longer.

The CoT numbers came out before the mid-week selling, so we don’t yet know whether it had an appreciable impact on the player positioning. This CoT (Tuesday, the 26^th reporting date) has the small specs and farmers covering some of their shorts while funds increased their longs and commercials increased their shorts. July looks like it could turn bearish, but December looks pretty strong.  With all the grains, look for indecision and uncertainty from now until the crops are in the ground. With the strange weather world wide – the folks who have been so devastated by our tornadoes have my sympathy and my very best wishes – it would not be surprising to see uncertainty continue most of the way into harvest.

Beans found shorts covering and longs selling across the board. This week’s price action in beans was the least bearish/most bullish (not very bullish) of the three major grains. However, the bean chart really looks sideways. For the November contract, think of the range as around 1250 to around 1400, with July about 50¢ higher.

Stocks Bullish Despite Bad News

Stocks bullish despite bad news is the classic definition of a bull market. Unemployment was up a surprising amount, the GDP was down 40% from the prior quarter but Wall Street elected to focus on better than estimated earnings news. I can't imagine the market will have much trouble reaching its targets, as long as crude doesn't run too far up.

Fed Day: Historic Press Conference

Dee watched Ben Bernanke at the first-ever press conference held by the Federal Reserve today. Here are his thoughts.

Today was Fed day. Not just the usual report to the world after a two day meeting Fed day, but an historic, hold-a-press-conference-for-the-first-time-ever Fed day. Chairman Bernanke’s response to questions was, in my view, more enlightening than his prepared remarks.

A speculation often heard from the lips many pundits has been that the Fed will inject more funds into the economy by means of “Quantitative Easing, Part III.” Dr. Bernanke addressed that issue clearly. Under no reasonably foreseeable circumstances will the Fed embark on another round of stimulus. So much for the Wise Guys.

Inflation is a concern, both within the Fed and among the people at large. While the Fed does not expect oil prices to decline, its expectation of moderated inflation rests on the belief (or hope) that they will cease to rise. I’m glad the Fed’s view is not that the price of oil will fall significantly because that seems unrealistic for quite some time. As Indian and Chinese economies continue to expand, so will their demand for oil. The high level of fractiousness between citizens and governments in oil producing states is very likely to produce uncertainty among traders. Combine fear with the realities of hedge fund ownership of futures and swaps for nearly 50% more crude than the refiners own, and you have a great recipe for both volatility and sharply higher prices.

Chairman Bernanke expressed the view that reducing stimulus will be sufficient to keep expectations of inflation in check. He also expressed the view that inflation will remain benign because energy prices will plateau and food costs will decline over the next few-to-several months. This sanguine view of the future is most probably very optimistic. As I remarked above, energy prices are not likely to plateau and certainly won’t be free from “extrinsic shocks.” Just now, the entire world is betting that the Chinese wheat crop is not as bad as it likely is; that the Russian wheat crop will mostly recover from last year’s drought; and that the American wheat crop has not been debilitated by some rather poor spring weather. The simultaneous bet is that American farmers will produce near record crops in the cornfields and very good soybean crops.

If, instead, China has a 30% crop (three months ago, the Chinese faced prospects of a 10% crop) , Russia has a 60% crop and the US has “only” an 85% crop, we could see food shortages that bring wide-spread starvation and unbelievably high prices ($6 for a loaf of bread would not be impossible) for the next two to three years. Dr. Bernanke’s expressed view is that prices will drop sharply in the fall of 2011.

Dr. Bernanke also expressed the opinion that it is very desirable that the U.S. Government should reduce the deficit very considerably in the intermediate to long term. Though veiled, his express view was that the only two political parties in D.C. are screwing around, not making meaningful efforts to reduce the deficit. Implicit is that the Republican Party is a pack of power-hungry, short-term thinking donkeys who talk about deficit reduction but are unwilling to do what is necessary in the form of taxation and in the form of forcing corporations to bring middle class jobs back to America where they can be taxed for the benefit of America. On the other hand are the Democrats, another pack of donkeys, who lack sufficient manliness to propose a realistic program to get the job done.

There seems to be a disconnect at the Fed. Bernanke is clear the job market is weak (but “improving”) and he is clear that more revenues need to be collected as part of reducing both the Federal debt and the deficit. But he did not make the case that the least painful way to make both ends meet is to force big businesses to bring middle class jobs back to America. How does that help? Americans pay taxes to the US government, but jobs sent to India put revenues in the hands of the Indian government, and jobs sent to China generate tax revenues for the Chinese government.

Apart from that, and the fact that all the traders sat on their hands much of the day, worrying about what would be said by the Fed, it was a pretty routine day. The stock market decided it liked what it heard, both at the end of the Fed meeting and in Chairman Bernanke’s press conference. Bonds didn’t seem to care much one way or the other. Neither did the dollar, even though Bernanke expressly supported a stronger dollar.

What should you expect next? Expect bonds to be sideways to down for at least a few weeks. Someplace out there, rates must go up, sending bonds into a downward run. Expect the stock market to rally to at least 13,300 on the Dow, and possibly to 14,400 (we are currently at 12,690). One might reasonably expect a rest then, and certainly I’ll be re-evaluating the situation.

Case-Shiller Housing Report (mostly)

The Federal Reserve Open Market Committee (FOMC) began a two day meeting today. The Case-Shiller housing report for February was released, a set of quarterly corporate earnings were reported and one round of Consumer Confidence numbers came out today. The housing report was more bad news while corporate earnings were good news.

The bond market is up cautiously at this hour (12:30PM EDT), the stock market averages are up nicely and crude oil is off a trifle. One supposes crude is responding to news across the oil-producing areas of the Mediterranean/Middle East where stalemate is the order of the day.

There are many ways to look at the housing numbers. One is a comparison with the 100% year which was 2000. Cities in which the price of housing is, according to the report, lower than it was 11 years ago are Cleveland, Las Vegas, Detroit and Atlanta with Phoenix prices less than 1% above those of 2000. What these cities seem to have in common is lack of a stable, middle class job market.

The cities that have had the greatest percent decline from the highest prices between 2000 and 2011 are Phoenix, Miami and Las Vegas, all dropping more than 50% from their highs.

Dallas and Denver had the least drop from their highs, losing 10% and 14% respectively. Dallas prices are up just under 14% and Denver prices are up 21% since 2000. The 20 city average for the same time period is up 39%.

The cities that experienced the largest interim price increase, by which I mean the highest average prices in the period between 2000 and 2011, were Miami at 281%, LA at 274%, DC at 251% and San Diego at 250%.

Finally, the big gainers, even though they provide some heart-stopping losses for anyone who bought at the peak, are: New York City, +65%; Boston, +50%; Washington DC, the clear winner at +81% (are corporate lobbyists and politicians paid more than they are worth to the society?); San Diego, +55%; and Los Angeles, +68%. It does seem to be all about where the jobs are, especially where the good paying jobs may be found.

Dum Waxes Wroth over Housing, Jobs

Dum opines on today’s housing report:

Today’s new home sales report was at the top of the expected range. In good times, this would be cause for the stock market to rally, and bonds to sink. Instead, the report was met with a gigantic yawn. In a way, that is remarkable. Even though the numbers were better than February’s (both sales and median price were up), the numbers were still worse than last year. Sales were down 1.9% and prices were down 4.9%, both compared to last year’s numbers.

What is needed are jobs. The jobs that are being created are largely at $10/hr. and less. $10 per hour translates to about $1750/month before taxes are taken out. That income will service a maximum mortgage of about $125,000 if the applicant has no other debt. Very few houses are to be had on either coast or in Chicago for under $200,000, and not many as low as $200,000.  If no one can buy entry level houses, then, as a practical matter, no one can move up to a larger, more expensive home.

Strong action needs to be taken to bring prosperity levels for the average American worker bee up to those in Germany and Switzerland. That is unlikely for as long as corporations dominate U.S. politics. Too bad the U.S. Supreme Court lacks the honesty to respect the wishes of the founders of the country. The original corporation laws, understood by every signer of the Declaration of Independence and understood by both the Democrats and the Whigs (Jefferson, the font of ideas for the Democrats  and Hamilton, occupying a similar position for the the Whigs) were specific that corporations were primarily to benefit the public, not the private interest. Giving corporations political rights would have been anathema to founders. Honesty and integrity certainly seem absent from the right wing of the current court, and this is nowhere more evident than in a ruling expanding political rights for a group never intended to be given any of the rights of natural persons.

Capitalism & Free Markets

Dum: Alice, we hear frequent use of the term “socialism” by America’s Republican Party. We also hear the term “free markets” bandied about by the business communities, politicians and some economists. My recollection is that what we call “capitalism” is based on ideas put forth by the 18^th Century British thinker, Adam Smith. Was Smith’s view that an unregulated market, that is a totally “free” market, the best situation?

Alice: Smith absolutely did not believe that an unregulated market was best. Smith was focused on competitiveness and efficiencies to be had in the markets. Smith would have been appalled by the non-competitive aspects of the top tier of American business. Oil companies, banks, pharmaceuticals and even food production is dominated to the point of oligopoly by huge companies.

Dee: Remind me what an “oligopoly” is, please.

Alice: A monopoly is the control of a market by a single individual or company. An oligopoly is the control of a market by a few. Monopolies and oligopolies cause problems for a society in that they prevent competition. Suppose an oligopoly has existed for quite some time. It will have exploited its ability to raise prices, as the large pharmaceutical and petroleum companies have done, to create a deep well of money that allows them to drive new competition into bankruptcy by pricing the product below break-even for the new competition. When the prospective competitor has been driven from the market, prices go back up.

This prevents progress because most progress comes from evolution, not revolution. The automobile is an excellent example. Look back to Henry Ford’s Model T. It was a smaller, less comfortable car than today’s version. It was also less powerful and got much worse fuel economy. It didn’t even have a starter motor – a hand crank had to be used. But we got from the Model T to contemporary autos without any huge, revolutionary changes. Engines got better, bit by bit, from a 15 horsepower engine that got ten to fifteen miles on a gallon of gasoline while powering a vehicle of less than 1,500 lbs  to modern beasts that generate more than 500 horsepower and get more than 20 miles per gallon while sending a 4,000 lb vehicle along at 200 miles per hour. There were no revolutionary changes along the way. Manufacturers improved the safety, comfort and capability of the machines incrementally.

If Ford had been able to prevent all others from manufacturing cars, today’s automotive industry would be very different.

Dee: Are you saying that a free market is not an integral part of capitalism?

Alice: I’m saying a market that is totally unregulated will effectively destroy capitalism by allowing monopolies and oligopolies to exist; they will naturally destroy capitalism in their industries by ruthlessly destroying competition.

The Numbers in the Crude Oil Market

David Stockman was interviewed this week about the “Inside the Beltway” budget wars. His remarks were enlightening, entertaining and, perhaps, a little disquieting. This is well worth watching: http://finance.yahoo.com/blogs/daily-ticker/david-stockman-deficit-reduction-flimflam-swindle-taxes-must-134716994.html

What’s up with crude? Prices, of course. The funds dramatically increased their long holdings beginning in mid-February, which was when rebellion broke out in Libya. The questions one might ask include, “What is the ratio of fund longs to fund shorts, what are ‘normal’ ratios, and what fraction of the total position do the fund hold?”

The first category is that of producers and refiners. Without speculators, the entire market would consist of producers and refiners. Heating oil futures and gasoline futures would create the link between refiners and end user/distributors. The refiners-producers account for 42% of the total market. The producers are short nearly twice as many contracts as refiners are long, roughly 100 short contracts for every 57 longs.

Next are “Swaps,” meaning large banks who are allowed to use the regulated futures markets to hedge positions they take for clients in the unregulated, non-transparent, over the counter market. This should remind you of the wonders of the unregulated mortgage swaps and other derivatives that did such a great job of making tax-payers in most developed countries bail out the over-paid and under-regulated large banks who made billions before the market tanked from the excesses the banks generated. The banks are 29% long and 32% short, but we really don’t know what that means because we can’t backtrack the exposures in the OTC markets. Swaps account for a whopping 31% of the total market.

Funds, the next category, show up as responsible for 17% of the market, but I have to wonder how much of the long swap market they also account for. My guess is nearly all. If so, the funds, either directly or indirectly, control some 48% of the market. The funds long to short ratio is 865 long contracts for every 100 shorts. Something is terribly wrong here. The non-fund speculators of size are almost even in their betting: 97 long contracts for every 100 shorts.

Doing a bit of arithmetic, Fund net long positions plus Bank shorts equals 679,064 contracts. That means Funds control 59% of all long positions. That also means the funds are contracted to take delivery of some 679 million gallons of crude. That’s a lot of oil. The rest of the story is refiners have bought only 30% of the total long positions, thus 70% is in the hands of speculators, and only 11% is in the hands of trading speculators rather than… should we call them “manipulating speculators?” … the funds.

I remarked yesterday that the Saudi economists claim the supply/demand equations show the fair market price for crude to be in the range of $70 to $80 per barrel, not the current $110 to $115 per barrel. Do you think the funds will take delivery of the 679 million gallons of crude? Or do you think they are just trying to use financial power to replace supply and demand?

Manipulation in the Oil & Gas Patch?

TweedleDee Opines:

I imagine most of you will have heard or seen something about Amaranth unlawful manipulation of the gas market. Here is one such post:

http://www.bbc.co.uk/news/business-13166033

Natural gas is easier to manipulate than crude because there are fewer traders, fewer contracts traded. I will "do the numbers" over the weekend.

Most will remember the Enron scandal of some years ago. Recall, if you will, that Enron electricity traders were manipulating that futures market. The unlawful manipulation cost rate payers in California alone more than $1 billion.

On the other hand, manipulation need not be of the illegal/unlawful variety to skew the markets. All that is required is for the regulators to fail to enforce position limits stringently. The G.W. Bush administration made it clear to the CFTC that any employee who stringently enforced position limits in crude oil would be fired. Of course, both Bush and Cheney had and still have large holdings in the oil patch. I'm not aware of Obama holding any oil patch interests, but I am aware that the big banks, the facilitators of position limit 'skirting,' are still free from appropriate regulation. I suppose one can expect little else from an administration that, like its predecessor, employs Wall Street Bank former employees and/or aficionados as Sec. of Treasury and in other staff jobs that offer advice to a presumably well-meaning but financially ignorant president.

Over the weekend, I will see what, if any, enlightenment the Commitment of Traders reports, released today, may shed on the situation. I should note that the Saudi oil economists have recently stated that the supply/demand numbers imply crude oil prices in the $70 to $80/barrel range. Current crude prices are 40% to 50% higher than that.

America's Largest Industry, Housing, Still Sick

Yesterday, the March Housing Starts number was released. It was characterized as "stronger than analysts expectations," which sounds good. But new housing starts were down 13.3% compared to a year ago. That means there were fewer jobs, less money going into the economy and less taxes being paid.

Today Existing Home Sales numbers were released. In what must be an effort at comedy, the National Association of Realtors characterized March as "decent" even though sales were down nearly 3% from a year ago -- a year ago was not a "decent" year for home sales or for the housing industry in general. It was rotten. Isn't the logic of the situation that worse than rotten is "really rotten" not "decent?"

Thoughts About the Dow Industrial Average

Dum: Dee, what do you think of this morning's stock market opening?

Dee: I'd call it 'hopeful.'  I mean that I'm hopeful that we will see some upside follow through to a not-bearish but not-strong opening.

Dum: What about the longer term? Haven't we had a really big rally over time?

Dee: We really have. In mid-March of 2009, when enough got to be too much, we were near 6650 on the Dow. Now we are at 12,200. That's more than 200 points per month, on average, a whopping big run.

Dum: The way you put that it sounds like too much, too fast.

Dee: It really is. It would be surprising to me if we don't see some sideways, down or drifting down motion in the coming months.

What We Are About

Dum: We should tell the people what we are all about, don't you think, Dee?

Dee: Yes, we should. What are we all about?

Dum: I'm all about real estate.

Dee: Real estate? What about real estate? And why would anybody want to own real estate?

Dum: The investment aspects of real estate are one thing we'll talk about. Property management is another possibility. 

What are you going to talk about, Dee?

Dee: I live for the financial markets. I love futures & commodities. I adore the stock market. I am fascinated by trading and by investing. Of course, that means looking at the economics picture.

Dum: Economics? The Dismal Science? That's Alice's field, isn't it?

Dee: It is. I'm glad we have her -- she knows all there is to know about economics, including what it isn't.

Dum: Indeed! Too bad Alan Greenspan, arrogant sod that he is, didn't consult with Alice years ago.  We might not have had the stock market bubble and crash, and we certainly wouldn't have had the real estate bubble & crash. Damn fool!

Dee: Are we going to answer questions?

Dum: I think we should, don't you?

Dee: I do. If you readers will post your questions, we will get back to you. Is that enough for today, Dum?

Dum: I think it is.