Crude Oil is down to $115 (continuous cash futures contract). We also have some Backwardation — meaning futures (September contract) versus cash or spot contract.
That’s bad mojo — Markets are reading this as a positive, but I am less convinced. This looks to me like demand destruction brought on by a global slowdown is what has led Oil prices lower. That is not a good long term sign.
Efficient Markets? Well, if you think Whoopee! Global Recession! then sure. To everyone else, not so much.
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September Futures Contract
via BarCharts.com
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For the more technically minded traders out there, consider these Fibonacci retracements: A pullback to $110 is very likely . . .
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Continuous Cash Contract, with Fibonacci lines
Source: FusionIQ, Bloomberg
I wonder if its a combination of demand destruction and the commodity regulators finally cracking down. Looks like they started getting serious right around when oil started to come back down.
http://www.nytimes.com/2008/07/25/business/25cftc.html?_r=1&hp&oref=slogin
As far as demand destruction, its real. I don’t go meet my friends at the movies anymore, its $8 round trip up from $3 when Bush started office.
Once the price of oil comes down to reasonable levels you’ll slowly see people start spending more, but its going to take a long time for people to spend freely again. Everyone I know questions whether they really need something now.
Spot on Barry.
It’s funny to see the yabbering heads on CNBC talking up how great the falling price of oil is. They don’t understand what that implies. If I were to draw a picture of what a market crash would look like later this year, it would be presaged with a sharp break in commodities and a rally in the 10 yr bond.
If oil was falling because of some disruptive technological advance, then that would be different. However, the primary driver of the oil bubble has been good global economic growth. A sudden break in commodities would suggest a global economic slowdown.
Also, the pillars of strength in the stock market the last several months have been the commodities/materials/infrastructure based stocks. Who’s going to lead us now? Airlines? Financials? Retailers? Good luck with all that.
That being said, had to cover CL shorts today on the close. There is huge amount of OI for the 115/110 puts. It will be difficult to push oil below those levels. Also, 115 would be 23.6 retracement of the decade long advance. Additionally, we’ll get a pop in Chinese based demand post Olympics coupled with some oil outtages…should lead to a rebound.
A break of 115 would be pretty bad.
– AT
Underneath this dollar rise oil drop is just another confirmation that things are really bad out there. Stronger dollar means there goes exports – the only thing positive. And with people losing their jobs, they’ll more than likely save the difference in gasoline prices.
Dollar is a 5 month high vs. the Euro. And surprise! Price of oil goes down.
See what happens when the Fed starts to at least pretend to worry about the value of a $? The recent shoot up in oil prices was never a suppy/demand issue.
That’s because inflation is a lagging indicator and a decline in commodity prices is typical at this stage in a RECCESSION.
The stock maket is not the same as the underlying economy… most companies are in much better shape than the average consumer.
Doesn’t anyone study economics 101 anymore?
Ask yourself this… what industry is going to be the new leader in the market?
I can’t come up with one.
Debt crashes should be quite deflationary. The fact that the Fed pumped so much liquidity that it was able to cause price inflation (helped by China’s Olympic hoarding) was amazing. All the Fed’s ammo now must go to propping F&F, while the Olympics will be over in days. We ought to see deflation take center stage now…watch the hedge funds who went long oil and gold start collapsing.
How’s about the notion that the increase from $80 to $147 oil was not well correlated to actual global growth trends, but rather a speculative bubble that is simply reverting to the mean…as bubbles always do.
hankfest.
I think you’re wrong about the Fed having anything to do with this $ rally, but you raise an important concept. Why is the dollar rising? Is the dollar rising because the Fed stopped printing money? Rising because U.S. economy is getting stronger? Or is the dollar rising because the rest of the world is going into the toilet with us?
If the dollar is rallying because its clear the Eurozone is hitting the skids hard, then it is not bullish for the stock market in the long run. A good break down in the stock market usually begins with some central banker making a Big mistake with rates. Trichet made a MONSTER mistake when he raised rates in an obviously deteriorating global economy. He will be one of a number of suspects responsible for a market crash brought on by a global depression.
– AT
Maybe I’m wrong (I am starting to actually question my sanity and judgment), but unless/until housing finds a real bottom, the employment outlook improves, and the financial services firms raise more capital and truly clean things up on their balance sheets, I don’t see how this helps the economy in the short term.
Debt-laden consumers (especially unemployed and/or upside homeowners) are still strapped for cash at $3.50-$3.70 gallon and are pulling back on spending everywhere. How does this change unless the above occurs?
“How’s about the notion that the increase from $80 to $147 oil was not well correlated to actual global growth trends, but rather a speculative bubble that is simply reverting to the mean…as bubbles always do.”
Imagine the Dollar was still at parity with the Euro when oil hit $147. Some simple math would show a huge % of the price increase can be blamed on the dollar’s weakness.
jeff,
You are not insane…first, the market is rallying on lower volume, just like the last phony rally from March to Jume. As for the consumer, did anyone pick up on this from yesterday? Barry, what do you make of it?
U.S. Consumer Debt Spikes In June
Maurna Desmond, 08.07.08, 11:30 PM ET
Americans are filling their pockets with IOUs instead of shopping receipts.
The New York Federal Reserve reported a higher than expected surge in consumer debt levels in June, as the cash-strapped borrowed more to get by and more failed to make their monthly payments. Separately, retailers reported lower than expected July sales.
Outstanding U.S. consumer credit rose at an annual rate of 6.8% to $2.6 trillion in June versus 3.8% in May. Consumer debt jumped $14.3 billion, far above analysts’ estimates of $6.3 billion. The figure covers most short-term credit extended to individuals, excluding loans secured by real estate.
Andy, i think Bernanke’s recent pronouncements about inflation were made to boost the dollar which lowers the price of oil.
It worked…..
Will this help the economy or wall st? No, of course not, things are F&&&K for the next few years. I’m investing in canned goods for the basement.
Come on, don’t you think oil was due for a correction – a 100% increase in one year for a commodity is quite a lot.
How’s the ad market? Anecdotal evidence…I just saw commercials for a toy helicopter, a product to help bathroom caulking and a local community college on CNBC. Where is Merrill and UBS?
I agree that the price of oil falling is a bad omen for the world, and that the dollar’s weakness is not going to help the US economy. What I’d like to know from Barry is this: How long will this current bounce/rally going to last? Seems like all indications point down, but yet you mentioned earlier this week that we are ripe for a bounce!
My gut says it lasts a week, then we see panic towards labor day and into early Sept.
Now an ad for lawn seed patch.
Great reporting by Nesto: “after major market bottoms, the Dow has rallied 100% of the time…glad to give you some confidence.” He actually reported that in all seriousness.
I posted on here that I bought DUG several weeks ago at 26-27.50, I sold it all today at 39.
Best market to trade that I’ve ever seen.
Thanks for the “crack” analysis, Nesto Grande (and I emphasize the word “crack”).
Me-thinks the market rallies irrationally against all fundamentals for the next week or so, but will be followed by another bigger leg down precipitated by, get this, worse than expected financial results from companies (even though most are already guiding down and thus managing earnings to try to soften the blow) .
Crap, another 300-plus point Dow rally, allegedly due to the bear market in oil (down more than 20% from the peak).
A few more “bear market rallies” like today, and we’ll be trading at new highs. ;-)
You can sell every 300-point rally till the last one, when the northbound ‘A’ train leaving the station pulverizes you to the third rail. All aboard — WOO-WOO!
Unfortunately, I’m just fantasizing here. Maria Bartoromo ruined it by jumping up and down screeching whilst declaring a bottom. With her faultless wrong-way track record, a horrific crash surely lies just ahead. SELL EVERYTHING!
Would have to disagree with BR on this one — the run up over the last year was too huge to have been driven by fundamentals — so I’m doubtful the pullback reflects slackening demand, though fears of such may have been the trigger for the reversal. Mostly I think we’re looking at the unwinding of a momemtum trade.
It’s nice to see oil turn around and at least make an effort to seek out the average production costs. I thought those days were done
A global recession seems like a small price to pay since my immediate concern was being able to heat my house this winter.
@ Robert Ward | Aug 8, 2008 4:54:53 PM
Robert,
Have you thought about teenage girls to heat your home? They give off a lot of body heat and at this point are probably cheaper than oil.
an added bonus is that if you’re married the wife would probably go nuclear and that is even more abundant cheap clean energy (;
Thank gawd!
Finally I can drive again. My pants were starting to get too loose from all the walking.
I’m not quite thinking “Whoopee! Global Recession!” But, am a little self satisfied that I’ve accumulated DUG over the past few months. Of course, bought the first batch too early, but it’s done ok.
Also bought a lot of SMN, because other commodities were in a bubble similar to oil, that’s done even better than the DUG and you still have time to jump on if you want. Check out the chart going back a year. For example, Potash quintupled in a bit over a year and is falling back. It may be the Pets.com of the 2009 market.
There is clearly demand destruction going on in all commodities. Euro zone is sliding down. China has to crash if it has nowhere to export.
Back to oil. I think Ben sold too soon.
My quandry is when to sell the DUG. The DUG is inverse DJ Energy Index and not oil itself, although it has been more or less acting inversely to oil prices over the past few weeks. But, that will probably stop when it settles down somewhere below 100. Of course, expect there will be bounces on the way down.
The question is when the Energy Index will stop dropping. It’s still 20% higher than the beginning of 2007. Exxon, Shell, etc. can make comfortable profits at 80 dollar oil, but the oil service companies like Halliburton and Schlumberger will probably get hammered as the drilling frenzy subsides. Same for any oil companies that have oil that is expensive to extract and need high prices to make a profit off their reserves.
How long will it take for that realization to hit the analysts? End of the quarter when earnings come out?
Or should I just set a target price and bail when it’s hit.
Any input is appreciated.
David B, funniest comment I have ever seen in the years I have read this blog. Nice work!
Now I’m really confused! Oil doubled in the last year…did demand double in the last year? Or is oil affected by the USD valuations. Or its the pension funds. Well which is it?
Seems to me that it has to be mostly the latter two.
Bad mojo indeed, the dollar bounces and oil dives because Trichet realizes another rate increase gets him guillotined and $4 gas and $100 fillups have slammed americans into submission.
Two 300 point rallies on $115 oil? I guess the Dow should have been at 25000 at $60 oil.
i used to see a new oil top post almost every day in the past.
i thought that barry was never going to mention the crash of oil and take off by stocks.
demand destruction?? really?? so speculation is not something which happens in our markets..
70% up and down in couple of months is not speculation its efficient market.
Mike in Nola,
I might have sold too early, but I never got hurt by taking a gain. I did what you hinted at in your post, I set a price of 39 for sell and just stuck to it, 40-45% gain on my lots and it was over about 50-60 days so I’ll take that any two months.
A previous comment has criticized JCT and the ECB for raising interst rates in July. I completely disagree. The announcement to raise interest rates in June was is the main reason behind the decline in commodity prices. After all this is the main function of every conscious central bank: to regulate aggregate demand if this demand causes inflation.
It is not quite the way i would have wanted it, because preferably the Fed should have done this job, but commodities and most importantly oil are getting cheaper and this is arguably the best thing that has happend to the economy in at least 12 month. Though I am afraid at the first sign that global growth continues commodities will rebound.
No! Oil is dropping just like I said and the markets are rallying. I called the bottom here folks on my show–I told you so. Start buying folks, we’ve got ourselves a genuine bull market!
(Nevermind the naysayers that blame big brother for making shorting illegal now.)
Buy, buy, buy!!!
I’ve been in Beijing, Macau, Hong Kong, Amsterdam, Paris and Munich in the last 6 months. Slowing global economy – hogwash – only in the US! I’m long DIG, GLD and the like. This Dow bounce / commodity downturn is purely election engineering.
Ben:
I know what you’re talking about. I had SKF and set a target price of 150 which gave me a 25% over a couple of months. Was afraid of what Bernanke and Paulson would pull after seeing the Bear Stearns maneuver. I then saw it rise to 200 and kicked myself. Of course, they did eventually manage to drive it down to 112 this week.
ct..
you are the first “oil/energy bubble bust, but in denial”.
I don’t think the futures market was moved as much by demand destruction as by the signal that the Bush administration, finally, had no stomach for a war with Iran. After the debacles at Fannie Mae and Freddie Mac, and the punitive climb in oil prices, Bush finally got the message from both Paulson and the GOP – continuing on this course will bring catastrophe.
In retrospect, the price buildup looks like other price buildups of goods before wars. The question is, I guess, whether Cheney is finished – like Godzilla, just when you think the monster is down, he rises up again. I would bet that if the Bushies threaten Iran again, we will see a rapid inflation in the future price of oil. At the moment, however, the Bushies are opening an office in Teheran. You can’t get a clearer signal that no war is in the offing.
@ John Wellman | Aug 8, 2008 6:36:36 PM
John,
In times like these it is imperative for us all to really think about how to come up with innovative ideas to get us through this crisis. I’d like to think that not only would my ideas work but they would do wonders for the morale of America
Commodities Fall to Four-Month Low on Dollar’s Jump, Economy
Crude oil, corn and silver tumbled, sending the Reuters/Jefferies CRB Index to a four-month low, as a stronger dollar and slower economic growth eroded demand for raw materials.
Crude oil fell to the lowest since May, corn tumbled to a four-month low and silver touched its cheapest since January. The dollar had its biggest increase in almost eight years against the euro after European Central Bank President Jean- Claude Trichet said economic growth will be “particularly weak” through the third quarter. Fannie Mae, the largest U.S. mortgage finance company, said the worst housing slump since the Great Depression is deepening.
“People have gotten very worried about demand for commodities because of this global meltdown,” said Michael K. Smith, president of T&K Futures & Options in Port St. Lucie, Florida. “If all these major economies are going to slow down, people think that’s really bad news.”
The CRB Index of 19 raw materials declined 12.12, or 3 percent, to 387.42, the lowest since April 2. The measure is down 18 percent from a record 473.97 on July 3.
The UBS Bloomberg Constant Maturity Commodity Index of 26 prices had advanced for six consecutive years, bolstered by surging demand for raw materials in China, India and other emerging markets.
Crude oil fell $4.82, or 4 percent, to $115.20 a barrel on the New York Mercantile Exchange. Earlier, the price touched $114.62, the lowest since May 2. Oil has dropped 22 percent from the record $147.27 on July 11
Why has the dollar been so strong the last few weeks?
I think you might find the in-depth comment of “Maxed Out” interesting on Mish’s blog…
His figures would suggest a coordinated effort of central bankers had some effect…
This is in the article “US Dollar Rally Continues”…interesting thoughts by Mr. Maxed Out…
http://globaleconomicanalysis.blogspot.com/
Bruce in Tennessee
DUG = UltraShort Oil & Gas ProShares (AMEX)
well … your welcome ben
save a horse ride a cowboy
gotta get outta this place
seriously – do you all really think instruments of paper like DUG grease the wheel? well … need to add for ALL?
the system needs a young welder to replace me .. cause my bliss is gone along with 1/3 of my lung capacity
What we are seeing from CNBC is what I call:
“Armchair Pirate Commentary”. So, what is APC and how do you play? As evidence of what we are seeing out of MB and the rest of the funny car, it’s quite easy. You can even do this from home…
1) Get an eye patch and cover your right eye.
2) Get the cardboard from an empty roll of paper towel.
3) Look through the paper towel roll with your left eye.
4) The world will look chaotic, but just keep moving your head until you can focus on something pretty.
5) Say “Arrggh! Never in me travels have I heard such a beautiful siren as she!!!”
Step six is basically you getting your ass mauled by the bear you couldn’t see that is just over your left shoulder.
These days, it’s about the Macro, and it looks very shiny through my roll of paper towel.
*For a happier picture, feel free to use one of those rolls of cardboard from Christmas wrap. I just did and all I could see was Down 18,000!
/snark
Absurd, absurd, absurd. So the rally from $90 to $145, along with a couple $7-$10 one-day moves was all demand creation? Oil and other commodities were piled into to create one last blowout rally in a typical bubble, driven by irrational fears and the increased ability to invest in the asset class.
MikeinNola,
Yes, I actually have considered buying the SKF with what I sold out of DUG, but I still think that’s gonna drop some more short term, seems like the rally has some legs, could see the dow go to 12k or 12,250 or so. Instead I bought as much CHK as I could in different lots and I’m just going to stay long, buying more today at $42 and change. This thing has just gotten killed in the last few weeks but they have solid mgmt, fundamentals, etc. etc. and I like nat gas. We’ll see what happens from here i put a stop on it so I don’t lose my shirt.
I do have to say I’m really surprised that this deal in Russia/Georgia has not made nat gas jump.
To Brokawed:
You are correct, major reason I bought DUG a few months ago, all I heard all the way to the 140’s was how China and India demanded more so oil was up, 87 billion demand and 85 billion production, saudis are running out, there is no speculation, blah blah blah, out of all of them I laugh hardest at the demand story, as if china and india just demanded it all the sudden in six months. If you believed it couldn’t go down you’d believe anything.
to Greg0658, I’m not really sure I understand what you are trying to say, perhaps you got stuck in DIG???? Sorry.
To Jim Cramer, if that is really you, MY ASS you said oil would go down, and I seem to also recall that you didn’t call THE BOTTOM here, only for a few stocks. I think you suggested buying tech today? Apple??? why didn’t you suggest it back at 116 in January, oh that’s right, you made the comment that there was no reason to own tech there, too bad it’s at 176 today, and was almost 190 in June. Your better off sticking to books so you have a little bit more time to think before you speak… or write.