The Energy Report for June 11,

by Phil Flynn

http://www.firstenercastfinancial.co...

Jun 11, 2009

Why do we buy thee? Let me count the ways. Oil surges to another new high for the year driven by a slew of bullish factors that are so plentiful it is hard to know where to start. I suppose I could take the easy way out and just talk about the Department of Energy weekly stats that were really bullish. I am not just talking about the fact that the DOE reported a massive drop in crude supply of 4.4 million barrels or the fact that supplies in Cushing Oklahoma fell. I am talking about the fact that we saw draws in other categories such as gasoline which fell by 1.6 million barrels last week putting them well below the five year average for this time of year even as production increased. I am talking about the gas demand number signaling a potential resurgent green shoot like recovery in gas demand that actually went positive year over year. I guess I could even talk about the fact that distillate stocks actually fell when many thought they would rise. I could talk about the fact that U.S. crude oil refinery inputs averaged nearly 14.8 million barrels per day last week or that refineries operated at 85.9 percent of their operable capacity last week. Sure I could talk about all of that bullish stuff but it would fail to give you the depth and breadth and heights that our oil can reach when feeling out of sight. This market is not as dry as just simple supply and demand numbers. This market is a fascinating bit player in one of the greatest financial dramas in history and where this market goes and what is influencing it goes beyond the mundane and borders on the fantastic.

Oil had so much more to consider then just the supply report. Oil has been moving for a multitude of reasons and current supply and demand is just one of them. Oil is moving higher because it fears that the government is spending too much money. It is moving because the market is reacting to huge budget and trade deficits. It is moving because it is worried that rising yields and a lack of confidence in the dollar and our bonds may force the Fed to raise interest rates sooner than it wants to. Oil is acting as a hedge against inflation but it is also acting as a safe haven from those who want to abandon the dollar and US treasuries. Yesterday this market had so much news that went to the heart of what is worrying and moving the price of oil.

We started off the balance of trade number US Trade Balance deficit that widened 2.2% in April to $29.163 billion from $28.532 billion in the last month. The dollar seemed to rally after this report putting some early pressure on oil. Yet with a looming supply report and an important 10 year action ahead oil bulls did not run too far from home.

As anticipation built up ahead of the ten year auction there was news that the China Russia and even Brazil said they would diversify out of US Treasuries and replace them with International Monetary Fund bonds. IMF bonds are good to buy as the IMF needs the money but it is another sign that our debtors especially the Chinese are looking to alternatives to US treasuries. China has already been buying oil as a hedge. China car sales soared over 30% last month and industrial production is rising. The Chinese demand story is just part of it.

The auction for the 10 the year drove US long-term interest rate to the highest level for the year. The 19 billion dollar auction of ten year notes saw 3.99 per cent. It seemed like the action was good and had the sense of a central bank intervention from the perhaps Europe in a response to the moves from the Chinese and the Russian trying to provide some liquidity. Bottom line is the auction is sending signals that the policies we are using are not going to work forever.

Especially when you consider our oaring record Federal budget deficit which according to Bloomberg news reported that is already approaching $1 trillion so far this fiscal year widened in May from a year earlier as the recession subtracted from revenue and the government spent more to rejuvenate the economy. The excess of spending over revenue climbed to a record for the month and compared with a gap of $165.9 billion a year earlier. Spending 5.8 percent to $306.9 billion and revenue fell 5.7 percent to $117.2 billion. For the fiscal year to date, the shortfall totaled a record $991.9 billion.

How can we keep running these kinds of deficits and expect low yields and a strong dollar. The answer is you cannot. If you can’t do that how can you expect a low oil price when the dollar is weak and other country rather store oil then have dollars in the bank.

That’s why it is so frustrating when as Reuters news reports, “In response to soaring crude oil and gasoline prices, a U.S. senator on Wednesday introduced legislation to force the federal futures market regulator to use its emergency powers to stop market speculators from pushing up energy costs." The price for crude oil hit almost $72 a barrel on Tuesday, more than doubling from levels earlier this year. The higher oil costs have been passed on to consumers at the pump, where gasoline prices have jumped 60 cents gallon since the beginning of May. Sen. Bernie Sanders (I-Vermont) said the rise in prices is not justified because petroleum demand is down sharply from last year due to the recession. Yes and so is the price! And fuel inventories are plentiful. Well they may be plentiful in your eyes senator but the Department of Energy gas supplies are below the five-year average! We are seeing a historic drop in energy investment, senator. "Despite the record supply of oil and reduced demand, prices are going up, not down," he said. They are going up because you guys in the Senate never met a dollar that you couldn’t spend twice.

Sanders blamed the spike in energy prices on market speculators. I blame it on the senate that is discouraging production, pushing through cap and trade taxes, raising taxes on the oil companies, talking about spending more money driving down the dollar and increasing spending. "The last thing people need now is to be ripped off at the gas pump because speculators on Wall Street -- some of the same people who received the largest taxpayer bailout in U.S. history -- are allowed to jack up oil prices through price manipulation and outright fraud," he said.

Fraud! What fraud? What a baseless charge. What is he senator McCarthy now? Is it guilt by association? What proof does he have? Why is he making these baseless charges? Are the Chinese and Russians being fraudulent when they refuse to buy our debt? Is it a fraud when we run the biggest budget deficit in history there by shaking confidence in the dollar? Does he honestly believe that if our banks stop trading oil or even storing oil that the angry Chinese will stop buying it as well? Why can’t any politician take responsibility for their own actions? The Senator has been around, why does he not understand what the market is saying? Does he understand inflationary dynamics that is driving price? He can clamp down on the speculators in the marketplace and encourage more hoarding of oil supply by the Chinese and the Russians. Please Washington, stop the Madness! Stop the madness!!!

PS - The International Energy Agency raised their oil demand forecast for the first time in 10 months. One more piece of the puzzle.

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