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As of this writing, the markets were once again facing the double negatives of severe financial sector concerns and expectations for a prolonged recession. As we have suggested in a number of recent articles, the intensely complicated financial threat on top of the dismal economic outlook clearly justified the sharp slide in equity prices in November of 2008. Therefore it is not surprising to see global stocks back under pressure, the whiff of deflation in the air and broad based demand destruction dialogue present in a number of commodity markets at this time.
It was certainly disappointing to see the lack of euphoria following the passage of the landmark stimulus/”social reform” package, but apparently the market wasn’t enamored with the amount of classic spending in the plan. It is also possible that residual uncertainty from the unresolved financial sector situation prevented the market from reacting favorably to huge spending bill. It should be noted that talk of nationalizing the US banking system seemed to be viewed as a positive. Even former Fed Chairman Alan Greenspan expressed some support for it, and perhaps that will provide a measure of hope. One would think that the stimulus program will have some benefit, and one would also think that the Obama housing plan will contribute something positive, but with the market seemingly set to revisit the US auto sector travails in the coming weeks and the US Dollar remaining primarily a flight to quality instrument, it would seem like the odds are stacked against physical commodities in the coming weeks. It could be extremely difficult to discount the prospect of further demand destruction in a host of physical commodities in the coming weeks, but we continue to stand by the principle that sharply declining demand and further declines in prices will ultimately result in serious production losses and eventually in tightness in certain commodities.
In an attempt to put a positive spin on things, it should be noted that at recent price levels US gold reserves were worth roughly $253 billion and the US Strategic Petroleum Reserve a little over $28 billion. At last year’s highs, the petroleum reserve could have been worth as much as $84 billion. Without getting into a line-by-line dissertation on US budget expenditures, clearly there are vast sums of money in each annual budget going to programs that could be eliminated if the solvency of the US government were called into question. And while we aren’t suggesting that the US government sell off a national park or auction off battleships, it could, after borrowing an extra trillion extra dollars or so through typical channels, find money and assets it already owns to provide another wave of financial backing. In listing some of the larger US Department of State, Department of Defense and other expenditures as we have it Table 1, we are not suggesting that these programs are wasteful or ineffective. We are merely pointing to some areas within the budget that could be temporarily suspended in order to shore up the credit confidence in the US government.
In short, the US government might be deeply in debt and its citizens might also be deeply in debt, but relatively speaking, the United States is not without residual assets and tremendous wealth!
For other positives indicators, it should also be noted that 1) in the face of the latest deterioration in global macroeconomic concerns, money continued to flow aggressively toward the US, 2) on a weekly basis US retail expenditures for gasoline have now fallen by more than $1 billion from their peak and 3) mortgage rates around the 2009 lows were very close to providing some direct and rather significant assistance to the US economy.
One can’t deny the turmoil facing the US economy, but help is on the way in the form of recently passed government stimulus efforts. Clearly industries are downsizing, but a new way will be found in the capitalist system and ultimately we think it is wrong to bet against the combined efforts of the world’s central banks.
We suspect that another downdraft in commodities prices is to be expected in the remainder of February and into early March, but it remains our opinion this will provide an opportunity for those that want to get short and for those that still want to invest in the best of class commodities. The near term downtrend action should be used to finance longer term call plays.
Over the near term, it is our opinion that the corn market will need to “sell acres” by moving lower. The trade is already ramping up its projected ending stocks figures, and we fear that subsequent USDA reports will persistently yank down demand because of faltering feed and biofuel demand. After a $1,000 per ton rally from the November low to the February high on supply concerns, cocoa may be overpriced now that those concerns are easing. In the soybean complex after months of wondering why demand destruction in feed market wasn’t showing up, we are now beginning to see signs that it did take place, and that prompts us to suggest buying soybean oil and selling meal on a spread. With lower planted area for winter wheat, dry conditions in China and in the southern plains in the US and an outlook for declining production for the coming year, Kansas City wheat could be the best performing grain market in 2009, but it still may be a bit too early for a buy. As for the investing in commodities we have to point to copper as a market ready for long positioning. China and US stimulus may have a short-term positive impact.
Energy Market Commentary – 2009.02.26
by Dave Hightower on February 26, 2009
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CRUDE OIL MARKET FUNDAMENTALS: Energy markets are seeing strong follow through gains after a sharp rally yesterday was triggered by a very bullish inventory report. The energy markets are responding to a shift starting to take place in the market’s fundamental landscape. The unexpected and sharp decline in gasoline stocks and more importantly a stronger pickup in gasoline demand along with another decline in oil imports is an indication that the supply/demand setup may start to tip back toward a balance. Although crude oil is still facing a supply glut with stocks over 50 million barrels above year ago, focus is now on gasoline and concerns that low refinery operations will significantly tighten fuel supplies this spring. With the oil market so beaten down, the fundamental changes for gasoline starting to be reflected in the EIA report seems to have inspired the trade to look beyond the current economic bleakness and start to price in the tremendous amounts of government stimulus being spent to revive the economy. It was particularly bullish to see energy markets yesterday push aside both the very bad economic news and another sharp drop in the equity markets and that suggests the energy markets are starting to pay more attention to internal fundamentals than macroeconomic issues. In fact, bullish sentiment was fanned overnight by a report that the UAE announced sharper supply cuts to Asian customers for April raising speculation that OPEC will certainly cut production at their March meeting. Certainly part of the rally this week in oil has been response to evidence of a high compliance rate by OPEC. With a variety of economic reports due out today, the resolve of the bull camp could be tested and if optimism can hold, we suspect April crude oil may have the technical capacity to rally back to the $47 to $50 price range.
PRODUCT MARKET FUNDAMENTALS: GASOLINE: The gasoline market has extended yesterday’s upward price thrust in the overnight trade. Every aspect of yesterday’s inventory report was bullish for gasoline as the 3.3 million barrel stock decline, a nearly 1% decline in refinery operations and a 1.7% rise in demand shows the fundamentals are starting to turn positive. As a result, gasoline stocks are now 17.5 million barrels below year ago levels leaving gasoline with the best fundamentals setup of the energy complex. With refineries in the midst of a heavy maintenance schedule there is certainly cause for concern for gasoline stocks to tighten sharply into the spring. It may not take too much in the way of a pick-up in gasoline demand to accelerate a fall in gasoline stocks. Since April gasoline looks to have reached a technical oversold extreme near last week’s low the market may have the capacity to rally back towards $1.40 level given the improved fundamental outlook. In fact, a push above $1.2968 could inspire more aggressive chart based buying.
HEATING OIL: April heating oil is being pulled higher by the strength in the rest of the complex. While the market’s fundamentals aren’t as strong as gasoline with distillate stocks still over 20 million barrels above year ago, low refinery rates should help to limit build ups even though demand has yet to show any signs of recovery. With market also technically oversold, we suspect heating oil could see a near-term upside price target of $1.3453 if gasoline continues to provide upside leadership.