Which of These Markets is Wrong?

By Steve Saville

The US$ oil price and the Canadian Dollar (C$) have tracked each other closely over the past 2 years. When divergences have happened they have always been eliminated within a couple of months, usually by the oil market falling into line with the currency market.

In a 25th May blog post I wrote that an interesting divergence had developed over the preceding few weeks between these markets, with the C$ having turned downward at the beginning of May and the oil price having continued to rise. This suggested that either the currency market was wrong or the oil market was wrong. As I stated at the time, my money was on the oil market being wrong. In other words, I expected the divergence to be eliminated via a decline in the oil price.

The oil price was $49 at the time. Over the ensuing two weeks it moved a little higher (to $51) and then dropped by 20% within the space of two months. The result was that by early-August the gap between the oil price and the C$ had been fully closed.

The oil price and the C$ then traded in line with each other for about 6 weeks before another divergence began to develop. Again it was the oil market showing more strength than was justified by the currency market, and by early-October it was again likely that there would be a gap-closing decline in the oil price.

As expected, there was a significant decline in the oil price from mid-October through to early-November. However, the following chart shows that the gap was only partially eliminated and that a rebound in the oil price over the past 1-2 weeks has potentially set the stage for another significant gap-closing move.

I won’t be surprised if the oil price trades a bit higher within the coming two weeks, but my guess is that it will drop to the $30s within the coming three months.


More Bad Economic News From the Oil Patch

By Jeffrey Snider of Alhambra

[Oil] supply remains a problem but focus has finally shifted toward demand

At the end of August, the US Energy Information Administration reported that it had been overstating domestic demand for oil and energy products to a considerable degree. Using imprecise and lagging data, the calculations for the amount of product being exported overseas was understated by an average of 16%. That meant more output was being used elsewhere, thus less product being used here. While that is a positive for US producers being able to ship wherever they can, it was a more savage reflection on the economy especially this year.

In other words, nothing terribly surprising in oil unless you are expecting dramatic improvement for the US economy through something like a “full employment” liftoff. Instead, viewing oil as a primary intersection between finance and economy, the “rising dollar” part of the eurodollar decay unsurprisingly remains as an ongoing process – not a cycle to be moved into and then quickly out of. All the same mechanisms that were shocking economists in late 2014 and early 2015 are still visible here in the summer of 2016. It’s not going to just go away; like oil and gas inventory, it only gets worse a little more each time in these uneven waves.

Today it was the influential International Energy Agency’s (IEA) turn to deliver more such bad news. When oil prices first crashed starting in late 2014 and really January 2015, commentary was filled with the words “supply glut.” Particularly related to US fracking as the biggest contribution to non-OPEC growth, the intent in using those words almost exclusively was to downplay the possible negative implications of a serious commodity crash (especially what was causing it) given that such crashes are monetary by nature. At most, there would be some words expressed about economic “concerns”, but for the most part oil prices were purported to be the victim of too much success.

A year and a half later, supply remains a problem but focus has finally shifted toward demand, though not by choice. And it is here that the IEA’s latest forecasts have hit oil views hard. First, OECD oil inventories continue to climb, hitting a new record of 3.11 billion barrels in July even though, “refinery activities reached a summer peak, crude oil inventories refused to decline.” Now, however, refineries are starting to reject additional crude supplies, forcing the IEA to reduce its 2016 forecast for coming refinery runs to the “lowest rate in a decade.”


The biggest problem related to the “supply glut” is that nowhere are there signs of economic recovery. Instead, demand continues to be well-off pace especially given where it “should” have been by this point. From the IEA report:

Continue reading More Bad Economic News From the Oil Patch

US Oil Inventories at Record Level

By Tom McClellan

US Oil Inventories at Record Level

Crude oil inventories in US
September 02, 2016

The EIA reported this week that U.S. total combined stocks of crude oil, gasoline, distillates, and other oils is at another all-time (i.e. since 1990) high, which should continue to put downward pressure on oil prices.  These inventory levels used to regularly peak out at around 1.1 billion barrels, but now they are at 1.4 billion barrels.  Note: Wolf Richter of wolfstreet.com has also written about this recently.

This rise blows away the scale of all of the previous fluctuations.  Note that this data series does not include oil stored in the federal government’s Strategic Petroleum Reserve (SPR).

The basic idea here is that traders who own oil or distillate products do not really like the current prices, and thus they would rather pay to store them in a tank rather than sell in this market.  They hope that there will be higher prices someday in the future, and they can make a profit storing the oil and waiting.  The way that a rise in storage reverses itself is for prices to start higher, attracting those products back out of storage.  So historically, getting up above 1.1 billion barrels in storage was a sign of a bottom for oil prices.

This time is different.  Storage has blown past that former ceiling, which I suppose is great news if you own a business building storage tanks in Cushing, Oklahoma, the delivery point for settlement of WTI crude oil futures contracts.  But think of the bust to come in that storage real estate market, once this trend reverses!

Continue reading US Oil Inventories at Record Level

Fed Ahead

By Tim Knight

As a reminder, this Wednesday is one of the year’s eight FOMC days in which, yet again, we sit up and wonder whether (a) the Fed will inch interest rates up a miniscule amount, thanks to the oh-so-fantastic global economy or (b) the Fed will do absolutely nothing, telling us for the 972nd time that they are data-dependent. Good Lord, how can you even stand the suspense?

Meanwhile, the only thing happening on my screen that is even a little interesting is that our friend crude oil continues its gentle, consistent downtrend, and quite remarkably, for the 7th day in a row, its low and high are both lower than the previous day.


Every. Single. Time.

By Tim Knight

Bears have been frustrated, and I am among them, that bear markets are allowed to go no longer than one, maybe one-and-a-half, days. This week brought another example. Monday was a market holiday, but on Tuesday, we had a nice tumble. The fall was continuing overnight, but our old pal Dennis “the commodity king” Gartman decided to go bearish on crude, and, well, the result was predictable.


I honestly think unless this guy will STFU, we’re never going to get a chance for a serious downtrend, because every time we get a nice, meaty down day, he rushes out to say he’s “bearish” on whatever it is.

I’m dumb, but I wasn’t so dumb as to hold on as I would have if Gartman had said nothing. When I saw the above on my Twitter feed, I started moving fast, and I made no secret of it:


Anyway, I gave back a little bit of profit from Tuesday, but, meh, that’s OK. I’m still very excited about the prospects Q3 is going to provide the bears, if only Mr. Very Very Slightly Bearish in Dong Terms would shut the hell up.

Rip Roaring Rally

By Tim Knight

Early in the weekend, I was asking myself how I was going to handle positioning before the big Brexit vote on Thursday. Well……..umm…….problem solved! It’s quite evident that the assassination of Jo Cox took care of the problem the ruling class in Britain was having with this whole “Brexit” nonsense, and, as with all things, we’ve glorious returned to the status quo.

As such, the ES has undone five days of losses with a monster lift-off:

0620-es, stock market

In turn the “flight to safety” (gold) was a failed bullish breakout. Frankly, I still think precious metals have terrific prospects in the years to come, but for the moment, the $100+ gains enjoyed in recent weeks are being taxed by a rush into risk assets yet again.

Continue reading Rip Roaring Rally

Back to Back… to Back?

By Tim Knight

It took just two days (today and last Friday) to wipe clean 11 days of bullish “progress.” Indeed, today on a big television monitor there was some wildlife footage of some bear cubs playing, and I naturally was completely charmed by what I saw. I mused about the difference between real life bears and bulls. The bears are playful, intelligent, good-looking, and delightful to watch. Bulls, on the other hand, are huge, ogre-like creatures that push out – – what else? – – bullshit. I’m glad to be a bear.

In any case, I’m calling it a day, but I notice (with some nervousness) that the ES is banging right against the level I considered to be support. If we’re going to make any more progress, especially with the awful 2-day FOMC meeting commencing, we’ve got to break through this level with gusto.

0613-es, stock market

I am, as always, even more obsessed with crude oil, which I think is in a better position to keep the weakness going. I confess, having two fantastic back to back days feels like something out of a science fiction movie at this point. Dare I ask for a third?

0613-cl, crude oil

Still Focused on Crude

By Tim Knight

Happy Friday the 13th, everyone.

I’m still almost completely focused on crude oil for the overall direction of the market. The good news, for me, is that at least it seems to have stalled out: 0513-cr, crude oil

If crude begins to weaken in any meaningful way, I think you’re going to see the high-yield ETF start to crumble again, which could be one of the great trades of 2016.

Continue reading Still Focused on Crude