As I watched the markets fall apart in front of me Friday, I summarized some extreme ideas that are currently making their way through the marketplace. First, the world is coming to an end. Yep, they have called it. The credit waves are going to send stocks to zero and there will be very little or no economic value left in stocks, bonds and the banks. Commodities will sell of nothing and since there is no demand for commodities, you will be able to pick up some gold, copper, corn and beans for a grand total of nothing – after all it is being given way. Oh, did I mention that the US Dollar is all powerful and is the reason that the world economy has gone to zero? Oh, that was the fascination with things back in the 1930’s when the Fed hiked rates to defend the dollar! Finally, there will be no more need for gasoline. Everyone will walk to work, just like the days of yore!
Ok. I say this all in jest but this is what I am hearing. The bears are clamoring that debt is going to take us all down to abyss. Since I am a trader of futures, I know all too well how fast someone can lose tons of money all too quickly as the power of leverage can be, well…very powerful. That is the scenario that many are building for the current marketplace. I just had a friend email me and say that he sees Dow 3750 and S&P 650. Those would be extreme levels and probably feed into my crude oil to $30, if the economy dives to oblivion. Perhaps it happens. Perhaps it does not.
So what does this have to do with the price of gasoline or the price of crude for that matter? Well, in the opening missive I mentioned that there will be no need for gasoline anymore. Based on the selling in the pits today, that is now being confirmed in the heat market as well, even as the temps are supposed to be lower than a year ago. Now, I am being overly simplistic about the current situation, but these are the thoughts driving things at the momentum. However, I believe that crude is getting somewhat interesting at this juncture. This is coming from a guy who has been bearish on the energy markets for quite sometime. I believed that crude should have never rallied to $140 and $80 was more appropriate – that is if the economy performed much like it did in 2002 with the shallowest of recessions but as we all know, that has not been the case.
Demand for everything, as shown by the declining Baltic dry, has dropped significantly. Now the assumption out there is that the demand comes back slowly as the bounce back in the economy will be L shaped and not U shaped. This is a viable theory but I look at the cold (or warm) numbers of the distillate and gasoline areas to determine if crude is heading higher – global demand figures form OPEC and the IEA are nice but are on a delay. In addition, I watch the action in the price of copper for a clue as well. Generally speaking when both copper and crude are rallying, global demand is rising as well. Now, many will indicate that the hedge fund community can put the price of high grade around as well as the price of crude but historically these two have helped in determining and economic or demand low of sorts.
So what have the two been doing lately? Well, as the chart shows, stabilizing. Now before I get buried for declaring the recession over, take a look at the chart. Longer term you see decline. Shorter term, the Baltic dry, copper and crude have all come together and the momentum of the decline has slowed. This is something. It is not everything. Now, if we start to see gasoline consumption pickup and heating oil demand rise just a bit more than the norm, this could be an indication that the consumer is finding some support. The real test of the consumer will be next Friday when I believe we see some sort of low in retail – big discounts, big crowds.
Aside from this retail call, let’s get back on the crude story. Essentially I think, based on the various measures of economic output, that crude’s support sits in the mid 50s. If the economy rebounds, much better than the common belief that we are seeing depression #2, then we’ll see crude migrate back towards the $80 level over the next year. If the economy dives and my indicators in the chart fail again, then we are looking at a much steeper level in crude – perhaps somewhere down near the $35 level. I don’t expect that at this point and thus I am getting constructive on energy in general.
One last demand note. If the thing with Petro Canada is a leading indicator (postponing drilling in the oil sands), we could be positioning ourselves for higher prices again down the road as other oil sands projects get cut, based on lower crude prices. Without the oil sands, we are slaves to the Middle East in terms of supply. IF the oil sands become a boom, then supply is spread out among our neighbors – thus less geographic risk so to speak. Anyhow, less supply with a spike in demand (might come if the credit buildup I am hearing is real) could lead to a big move in crude or at least a rally.
Do I have an outlook then? Well, I would really like to see crude get back above the $60 level and the products find some demand which lows the relative inventory levels year over year. The best rallies I have seen in this market occur when demand is rising and inventories are falling – simply supply and demand. We have the stability on the copper, crude and Baltic dry index. Now we need to see the cold hard facts of the heat and gasoline market support for higher prices in the future. I remain ready….question is, will the consumer step up?
Ok. I say this all in jest but this is what I am hearing. The bears are clamoring that debt is going to take us all down to abyss. Since I am a trader of futures, I know all too well how fast someone can lose tons of money all too quickly as the power of leverage can be, well…very powerful. That is the scenario that many are building for the current marketplace. I just had a friend email me and say that he sees Dow 3750 and S&P 650. Those would be extreme levels and probably feed into my crude oil to $30, if the economy dives to oblivion. Perhaps it happens. Perhaps it does not.
So what does this have to do with the price of gasoline or the price of crude for that matter? Well, in the opening missive I mentioned that there will be no need for gasoline anymore. Based on the selling in the pits today, that is now being confirmed in the heat market as well, even as the temps are supposed to be lower than a year ago. Now, I am being overly simplistic about the current situation, but these are the thoughts driving things at the momentum. However, I believe that crude is getting somewhat interesting at this juncture. This is coming from a guy who has been bearish on the energy markets for quite sometime. I believed that crude should have never rallied to $140 and $80 was more appropriate – that is if the economy performed much like it did in 2002 with the shallowest of recessions but as we all know, that has not been the case.
Demand for everything, as shown by the declining Baltic dry, has dropped significantly. Now the assumption out there is that the demand comes back slowly as the bounce back in the economy will be L shaped and not U shaped. This is a viable theory but I look at the cold (or warm) numbers of the distillate and gasoline areas to determine if crude is heading higher – global demand figures form OPEC and the IEA are nice but are on a delay. In addition, I watch the action in the price of copper for a clue as well. Generally speaking when both copper and crude are rallying, global demand is rising as well. Now, many will indicate that the hedge fund community can put the price of high grade around as well as the price of crude but historically these two have helped in determining and economic or demand low of sorts.
So what have the two been doing lately? Well, as the chart shows, stabilizing. Now before I get buried for declaring the recession over, take a look at the chart. Longer term you see decline. Shorter term, the Baltic dry, copper and crude have all come together and the momentum of the decline has slowed. This is something. It is not everything. Now, if we start to see gasoline consumption pickup and heating oil demand rise just a bit more than the norm, this could be an indication that the consumer is finding some support. The real test of the consumer will be next Friday when I believe we see some sort of low in retail – big discounts, big crowds.
Aside from this retail call, let’s get back on the crude story. Essentially I think, based on the various measures of economic output, that crude’s support sits in the mid 50s. If the economy rebounds, much better than the common belief that we are seeing depression #2, then we’ll see crude migrate back towards the $80 level over the next year. If the economy dives and my indicators in the chart fail again, then we are looking at a much steeper level in crude – perhaps somewhere down near the $35 level. I don’t expect that at this point and thus I am getting constructive on energy in general.
One last demand note. If the thing with Petro Canada is a leading indicator (postponing drilling in the oil sands), we could be positioning ourselves for higher prices again down the road as other oil sands projects get cut, based on lower crude prices. Without the oil sands, we are slaves to the Middle East in terms of supply. IF the oil sands become a boom, then supply is spread out among our neighbors – thus less geographic risk so to speak. Anyhow, less supply with a spike in demand (might come if the credit buildup I am hearing is real) could lead to a big move in crude or at least a rally.
Do I have an outlook then? Well, I would really like to see crude get back above the $60 level and the products find some demand which lows the relative inventory levels year over year. The best rallies I have seen in this market occur when demand is rising and inventories are falling – simply supply and demand. We have the stability on the copper, crude and Baltic dry index. Now we need to see the cold hard facts of the heat and gasoline market support for higher prices in the future. I remain ready….question is, will the consumer step up?
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