Fed Dampens Summer Crude Trade

The Fed left rates unchanged last week. In its June 24th statement, the Fed stated, “The prices of energy and other commodities have risen as of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.”

For those that have difficulty deciphering “Fed Speak”, resource slack is the perceived surplus of a given resource. Hence, the Fed expects the burdensome supplies of crude oil to keep a lid on prices. And yet, the Fed’s year-end outlook deters the likelihood of an interest rate increase – which, in turn, spells weakness for the dollar - thus bullish for crude. Crude traders looked to the Fed for some indication of which way to push the market, and Wednesday’s statement provided a conflicting outlook. Accordingly, the Dollar and Crude Oil finished Friday virtually unchanged from the prior week. And with this lack of direction and July approaching, the dog days of summer trading are upon us.

For the second week in a row - and for the sixth time in seven weeks - a draw-down was recorded in crude oil in last Wednesday’s DOE report. 3.9 million barrels (MMbbls) were removed from inventories, yet we saw another build in finished gasoline inventories, plus an uptick in capacity utilization. Refiners are finally burning the raw crude that had been previously stored when prices were lower. As we near the start of the peak summer driving season, i.e. 4th of July weekend, refined gasoline supplies are ample and demand is still 3% lower than this time last year. As a result, NYMEX crude prices could weaken further and we are not holding our breath for demand to return anytime soon.

In the previous few months and as the “bear market rally” was taking place, the spot NYMEX crude contract seemed to follow equity markets far more than its own fundamentals. However, analysts at ETF Market Intelligence have noticed a strong correlation with the ICE U.S. Dollar Index as investors continue to flee government backed and dollar based securities for the “safety” of commodity based products, i.e. Energy ETF’s. Aside from last Friday’s pullback in both NYMEX WTI and the ICE DXY Index, we saw a distinct inverse relationship between the two.

Comments

[G. L. Turner:]

Stephen,

You seem to omit the effects of manipulative trading that the US Big Oil cartel and the Government Sachs 'analysts'/traders/sto... have on this spring's overzealous oil and RBOB futures. They tried to once again "create a bubble"...since they got away with it so well last year and think that it will be next year before the Obama Admin gets any amount of regs in place, therefore they see this as an area that they can control and win at on many levels...

The reality is, though, they have turned the recovery around quickly, and to their own detriment, as demand, already soft, has fallen even further due to much of a price run-up. At some point, they, or those they suck into these false trades, will get burned enough, that they will go away and leave the oil/gas market to the producers and users...and sanity and reasonable pricing will return.

Jul 01 10:53 PM

[untrusting ...:]

Stephen,

The level of drawdowns is much more likely the result of less barrels of oil imported. If imports go down more than demand goes down, then of course there will be drawdowns. The implication of drawdowns is that more oil is being used. This is simply not the case as demand destruction is still continuing. Thus drawdowns are a pretty poor indicator of demand, and this should be explained.

Jul 02 12:04 AM

[whisperonth...:]

Michigan promised us lower gas prices for the holiday weekend. This makes me wonder if they plan to raise the prices again afterward. Is this a push for an increase in tourism dollars? Or a lure that will bring us in to drive more and then slap us with the higher prices to go along with their hoped-for gasoline tax increase? Carrot and stick?

Jul 02 09:28 AM