Friday’s consumer confidence number rose for the 4th straight report in a row. This gain was considered by some analysts as a sign that the current recession may be nearing its end. Analysts at ETF Market Intelligence indicate that this viewpoint may be hasty, as the rise in sentiment might only be a dead cat bounce. To wit, U.S. household wealth lost $1.3 Trillion in the first quarter of this year. That is the seventh straight quarter drop, totaling $14 Trillion. Last week’s Fed Beige Book showed further deteriorating economic conditions from mid-April through May. Several districts noted that their outlooks have improved, but they do not see a substantial increase in economic activity through the end of the year. Yet, crude oil continued to defy logic last week, hitting a new high of $73.23. If you divide last year’s high ($147.27) by 2, you get a number very close (73.63) to this year’s high. In our opinion, a “logical” place for an illogical market bubble to pop and for reality to sink back in.
Last Monday aside, NYMEX crude oil for July delivery managed to settle above $70 a barrel in four out of the five trading sessions and even surpassed $73, if only for a few minutes last Thursday. The July WTI (West Texas Intermediate) contract gained $3.60 or 5.2% last week which led to seven month highs. July options go off the board this Wednesday, June 17th, and the contract itself expires next Monday, June 22nd.
OPEC, who is responsible for about 40% of the world’s oil output, lowered its global demand forecast for 2009. The producer group is anticipating that world consumption will decrease by about 1.6 million barrels a day or 1.9% by year end. Therefore, OPEC would be expected to announce additional cuts in production - or at least higher compliance to the reductions from last September - to keep the price of oil at or above current levels. In actuality, some members of OPEC are doing the opposite. Because of $70+ crude, certain nations (hint...one starts with an “I”, another with a “V”) have exceeded their monthy quotas which in turn has lowered compliance of previous cuts from over 80% a few months ago to 75% in May.
Oil prices are their own worst enemy the higher they go, especially in the current economy. Overall demand is 10% less than a year ago. There is upwards of 100 MMbbls of crude floating in tanker storage around the globe. The front month contract is still lower than the outer months (contango). $70+ bbl oil = $3+ gal gas at the pump. We could go on... Analysts at ETF Market Intelligence believe this trend won’t be sustained, and if crude fails to hold its current upward pattern, a correction down to the $50-$60 range may very well be in the works. Near-term however, we are cautiously bullish.