A litany of lows.
Another smashing day as commodities gets smashed again. Oil fell like a coin sinking in a bottomless lake as it fell in sympathy with a pathetic stock market. All the commodities fell in a deflationary spiral. Oil hit its lowest level since March of 2007. RBOB gasoline hit its lowest level since ever or at least since they have been trading the RBOB back in 2005. Heating oil is testing last month’s low which is was its lowest level since 2007.
Stimulus or no stimulus the shock still has to be that China has to stimulate its demand for commodities in the first place and that fact is still reverberating around the pits. Dow Jones reports that China it will raise export tax rebates for the third time this year, as part of the government's CNY4 trillion (586 billion) economic stimulus package to bolster their faltering economy. These lows in commodities are not only a sign that demand is fading but demand expectations are fading as well. And the litany of lows does not stop with petroleum, it has hit cotton as well. The cotton market has been driven by Asian demand and without it cotton hit a low of 2845, the lowest level since 2002. Sugar is on a two week low. The Asian stock markets weakness overnight seems to suggest that the Chinese stimulus package will do little in the short run to shore up the market or shore up demand.
And demand is falling all over the world and is now driving oil and commodities in a historic readjustment in the world economy. Even the Bank of England has acknowledged that these changes are raising the potential risk of deflation. The Bank of England warns that their inflation rate will fall well below the 2.0% target in the medium term if the benchmark interest rate remains at 3.0%. The Bank of England said there was some risk of a period of deflation if rates remain unchanged raising the specter of more rate cuts though yet at the same time risk of a period of falling prices was relatively small. The bank projects that because of subpar growth, inflation will slow sharply in the near term as energy and food prices decline. Further out they expect that inflation will fall well below the 2% target, reflecting a larger margin of spare capacity and the waning impact of import prices.
Ah yes spare capacity. Something that was almost nonexistent in commodities. No spare production capacity, no spare refining capacity, not enough acres available for ethanol, etc. Slower demand means more capacity as we go from under supplied to oversupplied. That pendulum continues to swing.
Of Course at some point that will have ramifications on the supply side and at some point low prices negatively impact supply. Just yesterday it was reported that OPEC is looking to cut production by one million barrels a day at its scheduled meeting in December but that is actually less then what was talked about earlier. OPEC has got to be a bit embarrassed by the fact that they had called an emergency meeting and oil continues to dive to a 20 month low. That may mean that any action they take in the future may be made with less noise and fanfare to avoid embarrassment. The International Energy Agency, according to Dow Jones Newswires, is warning that oil project delays announced by several companies in recent weeks amid the fallout of the global financial crisis are raising the specter of new crude supply problems by 2010. IEA chief Faith Birol says that, "We see and hear about energy investments being delayed. This is a major worry and could lead to a supply crunch and much higher oil prices than we've seen before.” The IEA also had some soothing worlds for peak oil freaks by saying that although global oil production is not expected to peak before 2030, conventional crude oil production is projected to level off toward the end of the projection period.
It is an impact that is already impacting alternative fuels. Mark Shenk with Bloomberg News reports that energy companies are cutting back development of Canadian oil sands which he reminds us is the world's biggest energy reserves outside Saudi Arabia. It seems that as crude prices plunge, processing costs become prohibitive. Shenk says that Royal Dutch Shell Plc, Suncor Energy Inc. and EnCana Corp will reduce plans to extract bitumen which is the tar-like raw material for the crude, after prices fell 65 percent to $37.07 a barrel since July 4. The Canadian Association of Petroleum Producers reduced its forecast for spending next year by 20 percent to C$16 billion ($13.6 billion). It was just last June that the trade group said companies would spend C$126 billion over the next five years on pipelines, mines and upgrading plants as record oil prices made the Canadian reserves in Alberta increasingly lucrative. Now that figure has now been chopped to about C$80 billion.
What we are going though is a major historic readjustment that is not going to be bullish in the short run. Oil has it next major support at $56.00 in oil and demand will continue to fall. We have to find the level that will increase demand. Talk of more rate cuts in Europe is helping to bring us off the low but we still have a long way to go before we can talk about a bull market once again.
We're short December crude oil from apprx 7439 - lower stop to 6900!!!
Buy December heating oil at 18000 - stop 17600.
Sell December RBOB at 13600 - stop 14400.
Buy December natural gas at 515 - stop 500.
