Oil Crashes

Posted: May 12, 2011 12:01 AM

If you want to stick it to speculators, the best way to do it is to wait until sentiment is extreme, then hike margins right before bearish supply data. That is precisely what has happened.

I discussed collapsing demand on May 6 in (please see Oil Consumption Demand Destruction vs. Speculative Futures Positions.

CME Doubles Daily Price Limits

Today we see Oil Drops Below $100 as U.S. Supplies Surge

Oil fell below $100 a barrel in New York and gasoline tumbled the most in more than two years after an Energy Department report showed that U.S. supplies surged and fuel demand slipped.

Crude dropped as much as 5.2 percent after the department said stockpiles jumped 3.78 million barrels to 370.3 million last week. Gasoline inventories unexpectedly increased 1.28 million barrels to 205.8 million, the first gain in 12 weeks. Total fuel consumption declined 0.9 percent to 18.2 million barrels a day, the lowest level since June 2009.

“We have a tremendous glut,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York. “The rally in commodities appears to be over. We’re going to see prices work their way lower in coming weeks.”

Crude oil for June delivery fell $5.13, or 4.9 percent, to $98.75 a barrel at 2:17 p.m. on the New York Mercantile Exchange. The contract slipped as much as $5.43 to $98.45. Prices are up 29 percent from a year ago.

Gasoline for June delivery dropped 25.9 cents, or 7.7 percent, to $3.1207 a gallon in New York. The contract declined as much as 9 percent, the biggest fall since Feb. 2, 2009.

CME Group Inc. suspended trading of gasoline, crude and heating oil on the Nymex for five minutes starting at 12:06 p.m., said Laurie Bischel, a spokeswoman for the exchange in Chicago. Trading was stopped after June-delivery gasoline fell 25 cents, the daily limit. Limits were widened to 50 cents a gallon for gasoline and heating oil and $20 a barrel for crude.
Double Limits on Heels of Margin Hikes

The Wall Street Journal reports Crude Tumbles As CME Margin Hike Spooks Investors
Crude futures fell sharply in Asia Tuesday as traders responded bearishly to an announcement by CME Group Inc. (CME) of an increase in margin requirements for oil contracts, which could force speculators and small retail investors to close out positions.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in June traded at $100.37 a barrel at 0600 GMT, down $2.18 in the Globex electronic session. June Brent crude on London's ICE Futures exchange fell $1.93 to $113.97 a barrel.

The decline followed a sharp 5.5% upward rebound in Nymex crude overnight, as flooding and problems at a Mississippi refinery helped the market to claw back some of the previous week's losses.

The benchmark West Texas Intermediate light, sweet crude oil futures contract maintenance margins will increase from $5,000/contract to $6,250/contract effective at the close of business Tuesday, May 10, Chris Grams at CME Group told Dow Jones in an email. The move was CME's third increase in 2011.
US Oil Production Up

Please consider the Short-Term Energy Outlook, May 2011 from US energy Information.

click on chart for sharper image

That is one of ten pages of charts in the PDF.

My friend Tim Wallace writes
Fascinating, eh? Domestic production is UP, as imports are also down. The other side of the USA usage puzzle that no one seems to notice is the increase in exports of finished product since the peak consumption year of 2007. As we have consumed less internally we have exported more.

Looking at the data, in the first 4 months of peak supply - Jan '08, Feb-Apr '07, we averaged 21,128,000 barrels PER DAY in distillates supply. We exported an average of 1,205,000 barrels of distillate production per day, for a net of 19,923,000,000 used in the USA.

This year we have averaged 19,008,000 barrels per day in distillates supply, while exporting an average of 2,213,000 barrels per day, for a net 16,795,000 barrels per day used in the USA. This is 3,128,000 LESS used in the USA per day than in the peak time periods, or around 15.7% roughly.

Other factors coming into play bring the number to the 13.3% down my charts currently show.
Speculation a Symptom of Larger Problem

It might feel good to go after speculators, but speculation is only a symptom of the problem.

The real problem is central bank policy (Fed and Central Bank of China) that is far too loose. In 2006, loose money fostered housing speculation, now it fosters commodities speculation.


BOE Expects Lower Growth, Higher Inflation; Pound Strengthens on Expected Hikes; What is the Source of Inflation?

Growth in the UK is slowing, however, inflation as measured by consumer prices is not. The same holds true in China, and the US.

Bloomberg reports Pound Surges, Gilts Slump After Bank of England Lifts Inflation Outlook

The pound gained versus the dollar and the euro after the Bank of England said it sees inflation “markedly higher” in the near term, boosting speculation that borrowing costs will rise from record low levels. Gilts slumped.

Sterling advanced versus all but one of its 16 major counterparts, snapping a two-day decline against the shared European currency. “There is a good chance that inflation will reach 5 percent later this year and it is more likely than not to remain above the 2 percent target throughout 2012,” the bank said in its inflation report today. Risks to economic growth are “skewed to the downside,” the report added.

“People are bringing forward their predictions of when the BOE will make its first move on rates; that’s making sterling look like a reasonably sensible buy at these levels,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London.

Money markets expect a full 25 basis-point increase in the central bank’s key rate to December, Tullett Prebon Plc sterling overnight interbank average data show. Before the report, investors were factoring in a quarter-point rise in January.
Bank of England Signals Rate Hike

MarketWatch reports Bank of England signals rate hike likely this year
The Bank of England signaled Wednesday that its key lending rate is likely to rise before the end of the year in order to bring inflation back down to target by 2013.

The central bank lowered its outlook for growth, but raised its inflation expectations in its quarterly inflation report.

The report, which lays out the rate-setting Monetary Policy Committee’s economic assumptions, warned that inflation could hit 5% by the end of the year and “is more likely than not” to remain above the 2% target in 2012. The bank said its near-term inflation profile was “markedly higher” than in February.

Assuming interest rates follow market expectations, the inflation rate is likely to return to target by 2013, the bank’s forecasts showed. Forward market interest rates imply a bank rate of 0.75% by the end of the year, hitting 1% in the first quarter of 2012 and 2% in the first quarter of 2013.

The BOE’s King acknowledged rates will likely need to rise in the next two years, but said the high level of uncertainty surrounding the outlook for both growth and inflation made it difficult to gauge when a move would come.

Excluding Japan, mired in deflation for decades, the Fed remains the only Central Bank unconcerned about "inflation".

Source of Inflation:

  • Monetary printing everywhere but especially the US and China
  • Rampant, unsustainable credit growth in China
  • Fiscal deficits everywhere, especially US and UK
  • Fed sponsored speculation in commodities

The irony in this mess is that Central Banks purport to want to do something about inflation when they are the cause of it.

Five Course Corrective Action

  1. Abolish the Fed and central banks in general
  2. Abolish fractional reserve lending
  3. Rein in deficit spending
  4. Return to a sound money system
  5. Let the market set interest rates not a group of pathetic, bubble-sponsoring bureaucrats like those on the Fed and the Central Bank of China

Mike "Mish" Shedlock

See Ransom's Top Picks for Thursday:

Kudlow: Bernanke's Quantitative Neutrality
Ransom: Crass and Cynical on Illegal Immigration
Shedlock: Oil Crashes
Ennico: A 'Rich Guy' Speaks Out Against Higher Taxes (Part 1 of 2)
Goodman: Unforgettable 
Ransom: The Democrat Debt Mess 

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