"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


Thursday, July 19, 2012

More on Unleaded Gasoline - Ethanol

Yesterday I posted a chart and a very brief comments noting the rise in gasoline prices at the Nymex. Today we are seeing additional gains in this crucial market with the price currently up 1.5% as crude oil soars back through the $90/bbl level.

With the news out this morning that jobless claims ROSE by a GREATER THAN EXPECTED AMOUNT, we are once again being treated to the PERVERSE scenario where BAD IS NOW GOOD.

What I mean by this is what I have been saying for so long now that I feel as if I am beating a dead horse at this point - namely - the US financial markets have now reached a point where they have become completely and totally dependent on EXPECTATIONS OF FURTHER LIQUIDITY by the Federal Reserve.

That is what is driving the stock prices higher this AM as well as a host of various commodity prices; traders have again become convinced that the pressure on the Fed to "do something" is increasing with the passing of each day as each new data release reinforces the notion that the economy is in the crapper and descending further into the bottom of the out house.

Ironically, the higher that these damnable hedge fund algorithms in control of all the hot money floating around the planet push the S&P 500, the lower the odds that the Fed is going to actually start another round of bond buying. Why should they when the hot money crowd is already goosing the price of gasoline back to near the $3.00/gallon wholesale price BEFORE anyone has even hinted that the next round of QE is imminent?

Imagine where the price of gasoline is going to go if indeed the Fed was foolish enough to actually announce a definitive start date for a QE3 or QE4 or whatever!

With some grain prices setting ALL TIME RECORD HIGHS and gasoline soaring under that scenario, any so-called STIMULATIVE EFFECT from a round of QE would be non-existent. In cruder terms, the Fed would have shot its wad and have nothing to show for it.

Keep in mind that the sole purpose of Quantitative Easing is purportedly to LOWER LONG TERM INTEREST RATES to spur increased consumer and business borrowing. How in the hell are consumers supposed to ramp up borrowing with both FOOD and ENERGY prices roaring higher? Answer - they are not. So go ahead and launch another round of QE and keep the hedgies happy but in the end it will accomplish absolutely nothing except further increasing the size of the Fed's balance sheet and generating another round of huge bonuses on Wall Street.

Back to unleaded gasoline however - here is the news from yesterday's EIA report (Energy Information Agency). GASOLINE USE HITS 13 YEAR LOW FOR MID-JULY! How do you like them apples? Demand for gasoline was the lowest for this time of year in 13 years. Why? The EIA cited the weak economy and improved fuel economy. Yet the price of unleaded gasoline has rallied to near the $3.00 level from all the way down at $2.47 at the end of June.

So why is unleaded gasoline continuing to rally and become even more expensive when US domestic demand has fallen off the cliff? Let me first state that there is some built-in risk premium to the futures market over the seemingly always present tensions with Iran. That alone does not explain the price rise however.

Interestingly enough, this surplus gasoline is increasingly being exported overseas!

This brings me to a topic dear to my heart, specifically railing against the idiotic product known as corn based ethanol. This product , while a boon for farmers growing corn, has been an unmitigated disaster for our livestock and poultry producers.

Some may not realize that currently, 4 out of every 10 rows of corn planted goes to producing a product that ends up being burned in our gasoline tanks. That's right, about 40% of all domestic corn demand is the result of a federally mandated ethanol requirement. This "green agenda" has destroyed our livestock and poultry industries. Dairy farmers, Beef cattlemen, hog producers, chicken and turkey producers, are all being financially devastated watching the cost of their feed bills soar into the stratosphere while the price that they are able to fetch for their finished product is either stagnant or unable to rise at a fast enough clip to compensate them for their increased feed costs.

Even with the horrific drought, if 40% more corn was available to use as feed or for our export markets, prices would not be at these current levels and these various live animal producers would be able to avoid being financially crippled.

Interestingly enough, with corn prices rallying to record highs, ethanol plant margins are collapsing with crude oil at current levels. Some of these plants are going to end up shuttering their doors as they close down due to cost constaints. Additionally, there is increasing chatter that politicians are coming under pressure to do away with this foolish federal mandate for ethanol. While I would personally love to see this, with our current tree-hugger in chief in office, I doubt it would escape his veto pen.

That being said, some are buying unleaded gasoline as corn moves ever higher with the thinking be that political pressure is going to be doing nothing but increasing as the impact of this drought worsens. Think of ethanol as a way to stretch a gallon of gasoline - you basically dilute the stuff to 90% strength or 85% strength by mixing white lightning into it. Take away the ethanol and you have to use that much more actual gasoline to end up with the same finished quantity of fuel.

That may be what is pushing gasoline higher - imagine that - we have reached a point in our nation's industrial history where gasoline traders are now essentially trading corn.

Another fine example of a government produced FUBAR event.


  1. http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

    "By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the price's in dollars of those goods and services."

    - Bernanke, 2002

    "CREDIBLY THREATENING TO DO SO" seems to be working so why bother with the actual QE?

  2. Dan,

    First thanks for what you do. Not only is your "fundemental outlook" spot on, your "technical analysis" extremely educational. I have to comment! I believe that the markets are broken, and the politicians, big banks (JPM,C,BAC,GS) for certain, and potentially large european banks (HSBS,SoGEN,Deutsche,Santando, etc..etc..are perpetuating in tandem this whole facade. J, yes the metals crashed hard, and first, but if you chart the Dow, Nasdaq, S&P, etc against the metals and the metal stocks, something very interesting appears. The metals and metal stocks crashed about 1 week prior, and were well on their "rocket ride" north while the others kept on skydiving without a parachute. When the Banksters saved the world (hahaaha) they then headed north. It has been a fight ever since they realized in 2010 that the gig was up and gold (alternative currency of kings) would take over as the world currency. We are over mid term and by keeping everything crawling, I believe they missed the chance in cratering gold. Rather when the craziness begins, the Bank stocks will lead the skydive show.
    As far as the markets are concerned, who really knows at this point, they are not freely traded anymore. Our politicians and especially our current group of lying, cheating, opaque, kings are concerned, the do not even realize how many of us have lost faith.
    Hold lead, gold, silver, and plenty of food. I am seeing quite a bit of rancor on the streets in DC and Baltimore.

  3. Wow, trading corn instead of gasoline, then it doesn't really get the bang of the buck that's put into moon shine. Buying stocks on the thinking QE3 is coming. How stupid! Let it all tank first then QE will come, traders from where I sit just plain don't get it. Why buy on the expectation QE is coming, I guess they think they can get ahead of the game. Idots!~

  4. Hi Dan. I have a special request for you today. Could you include some of this in your weekly KNW interview. It is about Silver ETF (SLV) and the Commercial Traders COT Futures and Options Net Long As A % of Open Interest. It looks really interesting.

    More Earthquakes In The Silver Market

    Finally, many thanks again for sharing your knowledge and hard work with all of us.

  5. Just a thought about gold. Almost feels like it is trading like a stock that someone owns and keeps selling calls every week and collecting the money, on the very same shares each time. It will work until the shares are called away. So that is what needs to happen in gold. People have to demand delivery, or the sellers will just keep doing what they are doing

  6. Lehman moment is sure to be here soon. Central Banks, large banks all over the world unable to keep this system afloat. All data points to downward action on markets. The moment is near, hold on to your gold, the great V is near.
    You have to appreciate the complete and utter failure of our kings around the world. I will. It will come as a relief, even if it is the big tanking of markets around the world, to know that economics and the market finally take out the politicians, central bankers. This invisible hand has waited for years to appear. I will feel relief to get these large Apes off our backs. Dan, it appears that Jim S. has declared war. Wow, I have never seen him spout like he is. If the manipulators have him up in arms, it must be a sign of the final struggle.

    Chaos will rule for awhile, but the great reset will push us north again.

  7. CEO of Prodigy Oil and Gas, Mr. Shawn Bartholomae, has his own ideas about the ethanol
    debacle unfolding right before our eyes. Pieces continue to come to light about the
    government's use of ethanol mixed with gasoline to help promote US energy independence.
    "All the ethanol brouhaha began before the US's resurgence into the oil and gas market place,
    says Bartholomae.


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