Bad to the bone: The Unemployment Report, or the un-enjoyment report as it is known to some on the floor, is expected to be bad. How bad? Well super bad. Not only super bad but super duper bad and that is just sooo bad. Yet is this a case where bad can actually be good?
Let’s face it the market has priced in sooo bad it is really going to have to be awful sooo bad. Yet can anything or person actually be that bad? All right perhaps Michael Jackson, who is so bad that he's weirdly bad, but besides that. What else? The market is pricing in at least a loss of 250,000 non-farm payroll jobs as well as seeing the overall unemployment rate jump up. These are pretty bad expectations and a pretty bad number for the market to live up to yet based on recent events it could be worse than that.
After years of living in an overly optimistic environment is it possible that we have gotten back to the days where we expect bad and actually get worse. Take yesterday. Oil got zoned out as the Euro zone and the Bank of England thought things were bad enough to aggressively cut rates. The European Central bank hit the market with a half-point interest rate cut going to a 3.25 percent rate and the Bank of England thought things were bad enough to ignore market expectations and slashed rates with a record 1.50 percentage points cut to 3.0 per cent which put their rates at the lowest level in more than 50 years. This means as bad as things are things might actually be worse.
Oil of course reacted to the bad news out of Europe but it wasn’t just the rate acknowledgement by the central banks that things were bad and therefore energy demand would falter, but because there are signs that demand for oil and products are really bad. Petroplus is Europe’s leading independent refiner and wholesaler of petroleum products and announced yesterday that they were cutting runs (production) at its Teesside plant due to a lack of demand for distillate products. This is amazing considering the fact for years European refiners could barely keep up with demand for distillates and now they are cutting back. They are cutting back because the economy is bad and yes even worse than expected.
Yet long term is oil a great bet? Back month futures still say the long term bullish outlook for oil is still in play yet the big question is how long will our economic supply drought will last. Dow Jones Newswires reported yesterday that The International Energy Agency is expected to make substantial downward revisions to global oil demand in its November oil market report. Why? Well it's because at the same time the International Monetary Fund reduced its economic growth forecasts. Dow Jones quoting an IEA official as saying that it is pretty certain that revisions are coming. The official said that the IMF forecasts are one of the sets of data the IEA uses to derive its (oil demand) forecasts. (No wonder they are so often wrong). Dow goes on that the IEA, like most oil analysts - excluding me - have revised lower its global oil demand forecasts in nearly all its monthly reports this year amid weakening economic growth and increased energy conservation. (We have been predicting that.)
Of course that brings up the natural gas market. Yesterday the EIA released its weekly storage report which showed a less than expected injection of 12 bcf. Yet despite that fact the Natural gas tanked. Now some of it can perhaps be attributed to the fears of impending weak economic data but not all. Sources at Platts suggest that perhaps the market is seeing the less than expected increase in supply as a sign that producers are cutting back due to lack of demand. Low prices and low demand and firms talking cutbacks just added to the demand fog malaise.
So as oil prices continue to fall what is a poor tin pot dictator to do? Hugo Chavez has decided to nationalize its gold industry and control and pillage more of the countries natural resources to further push his agenda and cement his power. Now because he was very bad at running his stolen state run oil enterprises, this time he has decided to seek a little help. It was reported that the government plans to nationalize the Las Cristinas gold mine by 2009. The mine is estimated to have the largest gold deposits in all of Venezuela. That mine was conceded to and owned by the Canadian company Crystallex. Chavez is now taking over.
But why, is it just greed? Well yes and no. He needs the money because the price of oil is down and he needs cash flow desperately but it is really so he can make the Russians like him. Hugo needs to be loved and he hopes that he can entice the Russians to love him and give him weapons and at the same time run his gold mines. Sure enough a day after he took over the mines Reuters news reports that Venezuela plans to build mines at its largest gold deposits with Russian help, the mining minister said on Thursday, apparently killing a years-long bid by two Canadian companies to develop the projects. The decision reflects leftist President Hugo Chavez efforts to boost ties with Russia, increase state control over a key sector and speed up stalled mining development as tumbling crude prices threaten to crimp the OPEC nation's finances. Well it makes sense. The Canadians are not going to send him big fancy bombers so he can look cool at this year’s May Day parade so it stands to reason that it is time to get chummy with the Russians. In the mean time the people of Venezuela continue to live in poverty while another dictator exploits their countries resources and destroy their economic future.
Weather watch. No, the hurricane season is not over. Hurricane Paloma had winds near 120 km/h on Thursday and is headed toward the Cayman Islands and Cuba. Even though the storm at this time does not look like a threat to oil it is amazing that the market is not more on guard anyway. Is it because other storms have failed to live up to damage expectations and we are storm weary? Or is it because demand is so bad that even if the storm did some major damage it might not matter? There is so much more spare capacity in the world right now. Still we have to learn the lessons of the past and not become too complacent. Forecasters say the storm is expected to continue strengthening as it moves north.0
The new line in the sand for crude oil is $60.00 and whether we cross that line may depend on today’s employment report. It may have to be a real bad report to get us through that area but good or bad we should get through that area eventually. If not today then very soon.
We're short December crude oil from apprx 7439 - stop to 7210!
Buy December heating oil at 18000 - stop 17600.
Sell December RBOB at 16000 - stop 16400.
Buy December natural gas at 515 - stop 500.
