This has been a very exciting week, too bad it's ending.
Will there be Hell to pay for this week's party or are we back to 1999 party mode as the market tosses off bad news and plows ahead, regardless of all obstacles. You can't fight the bulls, you can only run with them while it lasts and hope you don't get trampled or gored at the end!
The oil bulls are on the march today after the Senate gave the market a scare by attaching greater oversight of the energy markets to the Farm bill, meaning the end is much closer than they thought. This sent oil down $4.50 a barrel in one hour on the NYMEX, which was really clearing out the suckers because the bill hasn't passed yet and they manipulated the price right back over $125 at the close and have run oil back over $126 again in overnight trading. The crux of the legislation is aimed at closing what is known as the "Enron Loophole," This is legislation that was passed by Bush, who's campaign was financed by Enron who also supported the Taliban in Afganastan, funneling hundreds of millions of dollars to the people who were supporting Bin Laden pre-911.
In 2000, at the urging of Enron and other large energy traders, a provision was slipped into an omnibus bill conference report that eliminated CFTC oversight of energy commodities traded by large companies outside of the regulated exchanges. This so-called Enron loophole has severely restricted CFTC oversight of energy trading.
Until laws were relaxed, ALL energy trading took place on the regulated NYMEX. In the late 1990s, Enron began to change all that by developing a way for companies to trade energy futures electronically, using computer software that operated outside of the regulated exchange markets – so-called “over-the-counter” trading.
Enron later collapsed, but the concept it pioneered of electronic over-the-counter trading, outside of the regulated markets, took off. In 2000, a group of oil companies and financial institutions, including BP, Amoco, Shell Oil, Totalfina Elf oil company, Deutsche Bank, SG Investment Bank, Goldman Sachs, and Dean Witter, founded a company in Atlanta, Georgia called the Intercontinental Exchange, or “ICE.” ICE specialized in electronic over-the-counter trading of U.S. energy commodities. In 2001, ICE expanded its operations by purchasing the leading European exchange for trading European crude oil and heating oil futures, the London-based International Petroleum Exchange. ICE renamed it “ICE Futures” and, last year, converted it into an exchange that does all its trading electronically AND UNREGULATED.
Many analysts believe this souped-up trading activity has pushed up oil prices by $20 — $25 per barrel. It’s why we have $120 per barrel oil instead of $90. As Tim Evans, an industry analyst, put it: “What you have on the financial side is a bunch of money being thrown at the energy futures market. It’s just pulling in more and more cash. That’s the side of the market where we have runaway demand, not on the physical side.”
"We're putting the cop back on the beat, and it's long overdue," co-sponsor Sen. Carl Levin, said as the Senate voted on the bill. Under the measure, the Commodity Futures Trading Commission will consider trading volumes and whether contracts are being used to establish a price reference for other contracts. The language is largely similar to recommendations made by the CFTC in a review of what extra regulation the agency thought was necessary. The provision also requires traders to maintain audit trails by supplying reports on any large trades to the CFTC, imposes record-keeping requirements, and forces electronic exchanges to monitor trading behavior and prevent manipulation.
This law has been over 18 months in the making so don't expect great things overnight. Bush spend his entire first year in office removing the regulations (per Enron's "suggestions") and it took all the way to 2004 before the mission was accomplished as the invasion of Iraq broke the $35 per barrel mark for the first time and over $60Bn of speculative money poured into the now International energy exchange and the establishment of tens of billions of additional ETFs to trade oil allowed another $40Bn worth of oil to be bought up by speculators. $100Bn is about 1 Billion barrels, more than the entire US Strategic Petroleum Reserve, that has been taken off the market by speculators. During this time, Bush also spent $19Bn of our money to fill the SPR with an additional 250M barrels BUT, he was not alone!
In March 2001, the IEA made an agreement that all 26 members must have a strategic petroleum reserve equal to 90 days of oil imports that caused member countries to raise oil stocks from 2.7Bn barrels to 3.8Bn barrels, which are currently in reserve. During this time China build up a reserve of 200M barrels as well. India, Japan and Russia also established reserves this decade which, combined with the speculators, have taken over 2.5Bn barrels off the market – the equivalent of and entire month's worth of Gobal consumption with Global storage now over 4.5Bn barrels.
Interestingly, it is only as these reserves are filling up to capacity (the US SPR has just 29M barrels of space left) and after OPEC has cut 3M barrels a day of production and commercial inventories are approaching 5-year highs, that the general public is being told by Goldman Sachs and others that oil will be heading MUCH higher. This is so similar to the top of the housing bubble it amazes me that the talking heads on CNBC don't mix up their lines when they are telling their listeners to BUYBUYBUY.
President Bush made XOM nervous by asking the Saudis to put more oil on the market this morning, and "the U.S. leader got a chilly response to his plea." It must be important to Bush because he is spending a whole day there! The Senate Democrats, who were concerned that a day trip may not do the trick, introduced a resolution that would block $1.4 billion in arms sales to Saudi Arabia unless Riyadh agrees to increase its oil production by one million barrels per day.
XOM CEO, Rex Tillerson, said he finds it "astonishing" that President Bush is asking Saudi Arabia to pump more oil rather than working harder to clear the way for more oil production at home. XOM's interest is to have us focus on ANWAR (7 years from production) or offshore drilling (5 years from production) rather than do something NOW about prices – that wins Rex our self-serving, nation destroying bastard of the week award – Congratulations Rex, you (expletive deleted)!
Speaking of expletives deleted, our pals at GS decided today would be a good day to raise their forecast for 2008 oil to $141 a barrel for the second half of the year, up 30% from the previous forecast of $107. They predict 2009 will hold at a steady $148 a barrel. The near-term oil market is being driven by “long-dated'' prices, or the price of oil for delivery 5 years forward, Goldman said. While an increase in U.S. stockpiles and declining demand growth due to the global economic slowdown is creating “near-term fundamental weakness,'' this is not causing lower prices, according to the bank. “We do not expect these softer fundamentals to translate into spot price weakness given the strength in long-term prices,'' according to the report. “We expect the bullish structural market to dominate the bearish cyclical weakness.''
In other words "We don't care if there is no actual demand for the oil, we're still going to drive prices to the moon!"
As oil hit $127 in after hours trading, China had some aftershocks and Asian markets ended fairly flat despite some better than expected economic growth out of Japan. Paulson's Treasury has decided against designating China as a currency manipulator, bucking Congressional pressure to act against China's currency manipulation and Chinese steelmakers are considering a boycott of RTP, who they say are manipulating the iron-ore markets. (This would be funny if it wasn't so tragic).
Europe is up about a point on strong earnings from British Airways and news that British Energy may be selling their nuclear power unit for $20Bn. The construction sector picked up and the banks stopped falling down as BCS showed a profit despite $3.3Bn in write-down, all good things!
In addition to $127 oil (and I did say at the beginning of the week they were going for $130, which is my top call) rallying the energy sector, we got a better than expected housing report and we will see if our markets can keep it together for the day. Of course 13,000 is a must hold for the Dow and we want to see the S&P stay above 1,425. As I said yesterday, I'm not going to be bullish until we hold these levels through next Wednesday.
Until then, be careful out there and have a great weekend!
