"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

Trader Dan's free work will soon be available at www.traderdan.biz

Wednesday, June 25, 2014

Volatile Crude Oil Impacting Commodity Indices

Hold onto your hat for the wild ride currently taking place in the WTI crude oil market. Yesterday afternoon, the front month soared nearly $1.50/barrel when news hit the wires of a Wall Street Journal "scoop" story that the Obama Administration was supposedly going to relax the export rules to allow two firms to export ultra-light crude. The firms are Pioneer Natural Resources and Enterprise Products Partners. This was regarded as a big deal because the US has not exported oil in nearly 40 years. We can export refined products just not the raw stuff.

Oil spread traders are having a field day on this news.

After being down for the previous two sessions, the price shot up, completely erasing those losses. However, and this is key, the market could not extend past the overhead chart resistance centered near the $107.50 level. It did manage to keep its footing near $107 but as more data hit, this time the storage or stocks number, the market began to slowly retreat.

The EIA showed crude oil stocks rose 1.7 million barrels to 388.09 million. The market was actually looking for a drop of 1.2 million barrels for that week. Both gasoline and distillate stocks rose.

The market however bounced higher mid-morning continuing its extreme volatility. What we are witnessing is the result of the massive speculative long side positioning with hedge fund longs in particular attempting to defend those positions.

The problem however in crude is what we were reminded of by both the EIA data and the bigger news, the incredible downward revision to Q1 GDP. To say that it was lousy, would be a disservice to the word, "lousy". It was abysmal! The number was revised to a nearly 3% shrinkage.

So here is the question - what in the world is crude oil doing up at these levels when the economy is seemingly going backward? Yes, I understand the Q1 number is backward looking and that markets are inherently forward looking, but given this sharp rate of contraction in the economy, we are going to have to have seen some quite rapid improvements in the economy during Q2 to get the number up near even 2.0 -  2.5% GDP growth. Even at a number like that, it is certainly not indicative of an economy roaring full spread ahead and it certainly is not one that would seem to be burning through crude oil at a rate to justify these rather lofty oil prices.

As I wrote previously, just how much of the crude oil price is due to geopolitical premium ( speculative demand ) and just how much is due to actual demand for the product itself? That is the mystery. This is why that big overhang of speculative long positions in this market makes me extremely nervous. At what point has the market fully factored in geopolitical unrest?

Another question - have these speculative players been buying crude as an inflation hedge? If so, how much of that buying is related to this?

I am raising questions that I have no answer for but am doing so to illustrate the complex factors going into the pricing of the black gold. But here is one big question - with an economy limping along, how can inflation pressures be a concern? Or are we witnessing the dreaded stagflation scenario? That the TIPS spread is increasing shows investors are worried about budding inflation pressures yet the economy is going nowhere fast it would seem. Food for thought is it not?

But let me come full circle and actually move towards the headline I chose. The commodity indices that we are now left with are too heavily weighted towards energy in my opinion but they are the only ones we have to work with. As such, energy prices have an unduly disproportional impact on the price levels of these various indices. Thus, I do not believe that they are truly indicative of what is happening across the broader commodity complex. Volatile crude oil prices can disproportionally drive the commodity indices higher when energy is moving higher and can also disproportionally sink the commodity indices lower when energy prices are falling.  

While these commodity indices are always helpful, one has to step back and consider some of the various sectors of the commodity markets, especially those with a lesser weighting in the various indices. Take a look at grains, such as corn and wheat for example. Corn prices, as well as wheat prices are both near a 4 month low. Soybean prices are near a three month low. Natural gas prices are essentially flat and have been for 4 months now. And while both cattle and hog prices have been soaring, they should be moderating later this year and especially into winter and spring of next year.

Then one has to consider whether or not rising energy prices are inflationary in this current economic climate, or deflationary.

The point I am making here is that there is still a great deal of uncertainty out there. Equities move sharply lower one day and then reverse course the next. Interest rates move higher only to retreat. The signals are all mixed up and that is what is leading to lack of clearly defined trends in many markets with the resultant sharp reversals in price from one day to the next.

It does sometimes feel as if we are living in some sort of weird parallel universe where everything is a mirror image of this one. In that universe, a near 3.0% contraction in the US economy for Q1 is greeted with equity buying and strength in crude oil making the stuff even more expensive and further dampening consumer disposable income.

What appears to be at work in equities, at least for today, is that some buyers are still considering that Q1 number an aberration and that growth is going to pick up for the remainder of this year. That may be the case; it may not be the case. No one really knows for sure. All it leads to each piece of economic data being scrutinized ever more closely to see how each piece of the pie comes together.

One brief point here - you hog producers out there - we have a Quarterly Hogs and Pigs Report coming up Friday so be careful. I hope some of you have secured some hedges in expected Q4 production and Q1 2015 production along with long side feed coverage.

More later as time permits.


  1. http://www.zerohedge.com/news/2014-06-25/chairman-chinas-largest-copper-producer-commits-suicide-jumping-hotel

    Uh oh Copper. This is the calm before the Storm folks...

  2. Definitely some wild action in the energy stocks.

    For example, the refiners TSO, VLO, MPC, WNR, etc. got completely destroyed on over 5x normal volume.

    On the other hand, major integrateds like COP which also have refining exposure went nowhere the last 2 days.

    Then check out the absolutely insane move in SLB on huge volume to new highs, yesterday's shorts were obliterated, and to a lesser extent same thing happened to PXD.

    I don't trust any of these energy stocks, except for some of the natural gas players still valued at bargains due to soft NG prices.

    I still say gold stocks are going to way outperform oil stocks the next 12 months.

    1. Mark;

      overreaction to the news related to the export of condensate output. Refiners have been able to take advantage of US oil output which had stayed in the country and built up the size of the storage. That is in question now although I personally think the market way overreacted to this thing - it is only for two firms.

      Storage is still huge when it comes to regular crude and not the lighter weight. That heavy crude will still be available to refiners at reasonable costs.

  3. Hi Dan,

    Looks like you are getting some bad press from TFMetals report and SilverDoctors. I think they all think you are very skilled at your profession, but they seem to think you are naïve to think the pms (as well as other markets) aren't manipulated. I'm linking them below for reference...



    1. The Gilliom;

      Those guys are part of the gold cult and are hopeless. Besides, one has to respect someone to actually care what they think about you!

  4. Gold is up 400 percent so far. These guys have whining about manipulation and how the comex would default all the way from 1900 since 2011. Clueless.

    Meanwhile its ok for Sinclair to hold q and a sessions behind closed doors and stating his company will produce ar 350 dollar per ounce in 2013 on multiple properties in 2013.

    Dissimination of false and minleading information - that is market manipulation by law.

    But with santa clause anything goes because hes the goid guy, right?

    There is a reason turd has to charge a fee and dan not.

    1. This comment has been removed by the author.

    2. Overall, the meme of "BTFD" while you can ( because the vaults are empty!) regardless of where the price is at or what the trend is has proven to be nothing more than short-sighted "the sky is falling" hysteria.
      It's blind squirrel stuff.

      It's a shame that some decent/trusting folks are now starting to realize that some of the wholesale lifestyle or economic changes in their life were for naught if those decisions were based solely or mostly on the convincing advice or obsessive belief systems of others.
      Make no mistake, a change to a simpler lifestyle brought about by an unbiased self-assessment is one thing ( and a good thing!).
      But a "head for the hills"/bunker mentality based on an approaching collapse being touted by some doomers has probably herded some people into some regrettable life altering decisions that might actually have endangered their already precarious financial positions.

      I get the sense that some folks out there are seriously reassessing the necessity or economic direction they've headed in the last 5 years while awaiting "the collapse".

      I'm not a gold/silver bear in the least so my comments aren't based in a 180° change of opinion. Au' contraire, my hope is that both metals appreciate greatly (or even modestly) so that I can eventually exit them dependant of course on what economic circumstances exist at the time or why the PM's appreciated in price.

      I genuinely feel for some folks out there who are starting to wonder..."wtf have I done and was it a wise decision to go 'all in' based on the fears of a collapse mentality while risking my families financial well being in the short term?"

      Good luck to anyone out there who finds themselves wondering why or how they allowed themselves to get completely wrapped up in someone else's fears and over-reactions.

      None of that describes myself as I'm not financially weighted in the PM's to the point that I have any regret or worries about their trend or current price.
      Luckily, my eye's were sufficiently jaded enough from the beginning that I took almost everything and everyone with a big grain of salt.
      All the pontificating bravado and certainty from some of the pundits or posters I've come across over time were mini red flags that eventually added up.
      My lone regret that I chose to purposely become tone deaf to the persistent negative noise for too long.

      One thing is for sure....I don't miss the thin-skinned/angry, self-righteous know it alls out there who CAN NOT (or are unwilling to) challenge their own beliefs that they've more or less dragged others into.

      We all make choices. A moth chooses to fly towards a black light because it finds it curiously attractive.
      Some people gravitate towards the darker, negative light of life based on fear.

      The folks who made wholesale lifestyle changes and who are now worried about lifes direction at some point will realize they've allowed themselves to be drawn to close to the "bug" light and they're starting to feel the heat.
      We all make choices in life.
      Regret is one of them...an avoidable one.
      Luckily, with foresight, I have none

    3. Well said, DPH. I simply don't trust myself enough to go "all-in" on anything. I have been wrong too many times.


  5. West Texas Intermediate traded near a three-day high before data that may show a strengthening U.S. economy and as violence escalated in northern Iraq, OPEC’s second-biggest crude producer. Brent was steady in London.
    BullionPremium Tips

    1. Shikah;

      I am going to ask you nicely that if you wish to advertise on my blog, then please contact me and I will discuss it with you. But if you are going to try to promote another company or another business here without at least having the courtesy to ask my permission, then please know that I will have all of your future posts blocked.

    2. Your in a good mood today, Dan!

    3. Dan, you are too nice. Shikah needs to be Ixnayed permanently! How rude!

  6. Dan

    You don't understand energy, so buy our silly Silver buttons and the Bad Thing will go away. (For us, at least)

    Ignore these dweebs

  7. NB Shika's firm would appear to be quite at home in Texas, Dan - from their website they look like a pretty mixed bag of Cowboys & Indians

  8. Hey Everybody, "stop the presses", the man out of Europe is now calling for $100 silver, based on his recent amateurish analysis of a break-out here. Oh, and not only does he give price, BUT also time, which of course is by '16 or so (mid). You just gotta love kwn.

  9. there is the CCI commodity index, which is the one for the old timers (used to be called crb), where energy is only 17+% weight.

    CCI just stopped at 50-day MA and is backing down into 20-day MA and 550 round number.

    large spec quote provider CQG still carries CCI, here's end o day from stockcharts:

    we can't be short crude oil no matter the ridiculous long spec length, until iraq is done. the hedgies will want to spike it to finish no doubt, previous highs 112-114 perhaps.

    In the ags, trying some WEAT eft calls might work for a 3 month trade. looking for some short covering in sept wheat and dec corn ahead of 11am monday usda report.


    1. 77;

      I wonder where stockcharts is getting that data for the CCI from? I have looked at the exchange website and cannot find it any more. My quote service providers also do not offer it.

      That was the best all around commodity index out there.

  10. Can someone (Dan?) tell me a little more about these "Dark Pools"? What I've read is a bit confounding...

  11. More Fed tea leaves...


    When rates eventually go up incrementally, even if the moves are relatively miniscule, don't say you haven't been forewarned that that's exactly what they'll do at some point.
    I suppose it'll be easier for some to keep on insisting that it's impossible for the Fed to eventually raise rates....or to even taper QE, but they have done so in earnest while PUBLICLY TELEGRAPHING it the whole time.

    Yet the denial or suspicion of the taper itself is being called into play as being phony or faked because it didn't seem possible or doable by the Fed. Yet it's happening and well underway at this time.
    The QE to infinity meme and the current tapering of it (aka reality) is a lesson in how "impossible" does indeed happen....and how it was telegraphed the whole time.

    The Fed's doing it again well in advance.
    Nothing is forever, QE to infinity is no different.
    Rates going up is inevitable.

    Is it possible that the QE 4ever cheerleaders simply have underestimated (mistakenly or purposefully) the Fed's ability to pave the monetary policy highway of the US and world because they are the biggest monetary road grader out there with more horsepower then some want to believe is possible?

    The "impossible" taper and an eventual rate hike (even if symbolically small) is the current direction they'll eventually pave out...and they're giving everybody a long term heads up in order not to majorly disrupt the markets.

    But...if you believe that the Fed or bankers or some evil monkey flying cabal is out to crater the markets and the world on purpose (collapse is imminent, in case you were unaware) you'll probably be wondering "how can they do that!?!?"

    The answer is....because they can actually do so (because they're monetary road graders!)....and they've telegraphed it wayyy ahead of time to those WILLING to listen and at least consider it as possible.

    Those that preach "the Fed is trapped/market collapse is imminent" are the same people who spout that the Fed is some evil, all powerful entity that has ruined the world in the past, present and probably in the future.

    So which is it? The Fed is weak and trapped and they can't possibly taper (lol) or raise rates forever or they're an evil banker on steroids who rules the world?

    It can't be both unless you can speak out of both sides of your mouth selectively. Rates will go up....denial of that possibility is your choice.
    I'd pay attention a little bit to what they've been telegraphing.

    And noooo...I'm not some banker or Fed apologist or a paid banker shill (like some unbalanced indibviduals believe Dan is) but I am objective
    and I tend to gravitate towards balanced and unbiased viewpoints at this point because the silliness of persistently negative and suspicious viewpoints out there was too noisy and incompatible with maintaining one's financial house.

    There's too much $$$ at stake to allow myself to be distracted by fear/meme juggling entertainers who are preparing for the end of too many things to be seriously considered as relevant especially when your (and your families) nest egg is involved.

    Ignore or fight the Fed at your own peril. Ask yourself...does the so-called smart money ignore these Fed telegraphs or pay attention to them?
    I wouldn't know, but I certaintly wouldn't stick my fingers in my ears and stick out my tongue at the Fed either.

    An open mind costs nothing. A closed mind can cost you plenty.

  12. If we notice the today's update of Epic Research, we can say that Crude fell on rising supply and tepid demand as OPEC lowered projected demand.


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