The Energy Report: Who’s afraid of the big bad Fed

Phil Flynn

First Enercast Finacial

Jun 23, 2009

Who’s afraid of the big bad Fed, the big bad Fed, and the big bad Fed? Who is afraid? Futures traders, that's who. The dollar huffed and puffed and blew the bull’s house down as commodities across the board got blown away. Is the oil market finally facing what many feel is weak demand reality or is the reality just changing. The World Bank's outlook for the global economy was partly to blame for yesterday’s commodity massacre as they called for a contraction in the global economy by a sharp 2.9%, a big leap higher than the more modest 1.7% contraction that they called for last month. News out of China was mixed as it was reported that Chinese oil usage spiked 6% in May which normally is very bullish but that spike came as their exports fell 26% percent leading the market to question the sustainability of China’s recent demand surge. Can China continue to buy commodities just for their own domestic consumption as the global demand for their products falter? Sure, all of that was in play yet it was the sudden strength in the dollar that seems to indicate quite strongly that traders, while worried about the impact that global commodity demand might have on Canada and Australia, see the move in the dollar to indicate that many are taking cover ahead of the Fed.

Still we have to acknowledge what the market seems to be ignoring. Iran upheaval after the disputed presidential election continues as there is the possibility of a nationwide strike to protest the results. The National Post reported that, “Iran arrested hundreds of people after deadly clashes on the tense streets of Tehran, state radio said on Monday, but the opposition defiantly vowed to press on with its post-election protests." The Post says that, "Opposition leader Mir Hossein Mousavi, who has led a wave of massive protests over what he says was a rigged election that returned Mahmoud Ahmadinejad to power, urged supporters to continue demonstrating but to adopt "self-restraint" to avoid more bloodshed.”

Still oil is unmoved as there are scores of producers waiting to fill any void in oil production that may happen in the event of a cut off in supply. Some worried that Iran’s military maneuvers might be a sign that Iran plans to try to cut oil shipments from the straits of Hormuz. More than likely it was to try to divert attention away from their domestic problems.

And then oil has to worry about kooks with nukes in North Korea. Threats that they might shoot a missile towards Hawaii and more provocative acts could come back to haunt us all. The Wall Street Journal is reporting, "The Pentagon continues to trail a North Korean cargo ship believed headed toward Myanmar, in part because U.S. officials worry that Pyongyang plans to transfer major weapons systems and possibly nuclear technologies to the repressive Southeast Asian country, current and former U.S. officials said.” The Journal says that, “North Korea has used Myanmar ports and airstrips to transfer arms and contraband to third countries, including Iran, these officials said. Myanmar's military government also has purchased on the open market technologies that are potentially usable in a nuclear program, and North Korean arms companies involved in the nuclear trade have become active in Myanmar, said U.S., Asian and United Nations officials.”

And let’s talk about a place that actually has seen oil production drop due to attacks and that place is Nigeria. Bloomberg news reported that, “economic growth in Nigeria, Africa’s biggest oil producer, slowed to 6.3 percent in the first quarter as crude oil output slumped. Growth in gross domestic product slowed from 8.2 percent in the final quarter of 2008. Nigeria’s oil production slumped 10 percent to 1.68 million barrels per day in the first quarter compared with the previous three months." Over the weekend it was reported by Voice of America that Nigeria's main militant group said it sabotaged three more oil facilities in the Niger Delta in response to a military offensive begun last in the region. The Movement for the Emancipation of the Niger Delta, or MEND, said in a statement e-mailed to journalists that the group had destroyed two Royal Dutch Shell oil pipelines in Rivers state. It is the first attack by militants in the eastern delta since MEND launched its latest campaign of sabotage. MEND said it also attacked a Shell offshore facility on Sunday. A Shell official has confirmed the attack on two Shell oil pipelines in Rivers state but denied that its offshore facility had also been targeted.

These stories normally would move oil but the cushion in spare capacity has made them basically footnotes in a market that is more focused on the dollar and global demand destruction. Of course inventories may also come into play tonight when the American Petroleum Institute releases their weekly inventory report and the Department of Energy version will come tomorrow. According to the Bloomberg Survey crude oil inventories are expected to fall by 1.2 million barrel as refinery output increases to meet peak summertime demand. Gasoline supply is expected to increase by one million barrels and distillates up 800,000. My response to the survey was in line as I called for crude to be down 2 million barrels gas up one million and distillates up 1 million.

Ahead of the Fed meeting, day trades and short term trades are the best option. The hard oil correction may be just the beginning of a major down side move or just a summer dip. The Fed will determine that tomorrow. In the mean time keep up with the latest on the Fox Business Network where you can see me every day. And if you have any questions feel free to call me at 800-935-6487 or email me at pflynn@alaron.com to open your account.