The market is starting out the week on a calmer tone as all was quiet over the weekend. The Iranian nuclear situation continues to disturb the market as it has for the last several years and as it will for the foreseeable future. I am still of the view that it will not result in an interruption in oil flow anytime soon. The biggest event over the weekend was the US Administration’s announcement of a plan to help the beleaguered mortgage giants Fannie Mae and Freddie Mac. The broad based plan is designed to keep order in the mortgage market and bring confidence to the financial markets. The plan includes money lending and even a stock buying program by the government. This will be the topic of discussion in the financial markets at least through the first half of this week. So far it has brought some calm to the market including a slight firming of the US dollar which in turn has pushed oil prices down so far this morning.
With the talk about the impact the speculators are having on the price of oil we need to look at the latest Commitment of Traders Report released by the CFTC late Friday. The following chart which plots the combined net long position of the non-commercial sector(speculators) for the three regulated futures contracts on the Nymex (WTI, HO & RBOB) versus the Friday closing price of a composite of the three contracts weighted based on open interest. The charts shows:
· The net long position of the non-commercial or speculative sector is at the lowest level it has been at since early Jan, 2008.
· On the other hand the composite price is at its all time high.
· The specs have been gradually reducing their net long trade since peaking in February, 2008.
As we have indicated and as the data suggests the speculative sector is not the reason oil prices are where they are today.
I must address the issue that has circulated around the weekend talk shows regarding Nancy Pelosi’s letter to President Bush to release oil form the SPR. The whole idea is another demonstration as to the lack of understanding as to the real cause of the whole oil crisis that the world is currently engulfed in. Since the DOE announced they would halt any further additions to the SPR prices of oil have continued to increase indicating that the sensitivity of the SPR to the price of oil is minimal or even non-existent in the short term.
· The SPR was designed to solve supply problems during periods of times when oil flow is interrupted from artificial causes (like the embargo in 1973), unplanned interruption in supply from any country and natural disasters like Katrina & Rita.
· The main reason why the world is in an oil price crisis is a result of the lack of surplus capacity to solve the normal and atypical problems that emerge in the everyday operation of the global energy complex. Surplus capacity has decreased significantly this decade due to an unprecedented growth in global demand, especially from the developing world, while supply growth has lagged due to many reasons. Some of the reasons are maturing of key producing fields, lack of investment by OPEC nations , limitations on drilling in places like the US (the largest consumer in the world) and unscheduled interruptions due to violence (Nigeria) and natural disasters like Katrina.
· The OECD world has about 1.5 billion barrels of oil in Strategic Reserves with the US holding about 706 million barrels. The consuming world has built a cushion that serves the same purpose as does surplus capacity except it is in the hands of the consumers not the producers in the volatile middle east or Nigeria or anyplace where the susceptibility for an interruption is very high. This is stable, safe surplus capacity.
· To remove any of this oil to possibly lower the price of gasoline (extremely low likelihood) is decreasing our safe cushion and putting it back into the hands of the producing countries that are a the highest risk for disruption. As we decrease our safe cushion we increase our exposure in the event of supply disruption.
· In fact, releasing oil from the SPR will likely cause prices to increase as the market players recognize all of the above and start adding to the already large risk premium on the price of oil.
We need to stop trying to fix problems that have been in the making for 30 years with a governmental fix that is likely to make the problem worse in the long run.
Currently prices are lower across the board as the dollar firms modestly. We expect this week will bring more of the same…high volatility, wide trading ranges with gains and declines in the same trading session. Geopolitics and the trading pattern of the financial markets, especially the dollar, are likely to be the main drivers for oil prices.
| Current Expected Trading Range | | | ||
| | 7/14/08 | Change | Upper | Lower |
| | | From | Resistance | Support |
| | 7:44 AM | Yesterday | | |
| Aug WTI | $143.69 | ($1.39) | $150.00 | $130.00 |
| Aug HO | $4.0405 | ($0.0361) | $4.0000 | $2.7100 |
| Aug RBOB | $3.5289 | ($0.0343) | $3.7500 | $3.0000 |
| Aug NG | $11.778 | ($0.126) | $13.500 | $11.000 |
| | | | | |
| Euro/$ | 1.5804 | (0.0032) | 1.6000 | 1.5200 |
| Yen/$ | 0.9413 | (0.0005) | 1.0450 | 0.9000 |
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