It’s not crude to protect the American consumer

In the last three months crude oil has soared 18.6%, while the S&P 500 and the 10-year bond are flat.

But why is that the case? Please don’t give me the old “summer-driving season”.

The United States is fast becoming the largest producer of crude oil in the world, ahead of Saudi Arabia and Russia, according to the newest EIA report.

Yet the difference between European Brent Crude and West Texas Intermediate crude is only $3 a barrel. Surely that spread needs to be much wider given the Iranian sanctions.

While the White House is pressuring Saudi Arabia to make up the shortfall of Iranian production, it needs to get a handle on domestic production to curtail rampant price hikes, which amount to gouging for US suppliers, since they are not selling large quantities on the international market.

If the 1970’s and 1980’s were about OPEC dictating price and supply, the 21st century should be about our energy independence and a domestic price suiting that situation.

If American crude producers can survive on $50 a barrel, then why let crude trade here for $70 a barrel?

The higher price only emboldens countries that despise us to gather more profits in order to fund operations against us, while wiping out any monetary gains Americans might realize from slowly rising wages.

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China staging a coup against king dollar

So the US dollar has weakened by 1% this week and the Dow Jones index is up 3.5% through Thurs.

Crude is up $5 a barrel over the week, which is roughly a 10% move and other commodities have moved in tandem including gold.

Now of course a weaker dollar helps everyone in the world except us. The amount of pain in the BRICs and OPEC over the strong dollar is quite evident, so a pullback was needed, but for how long is the question.

Will we see $60 – $70 oil by the holidays? I don’t think it will get that high since the US is the cleanest dirty shirt in the pile.

Time will tell who the sellers of dollars are, but China in defense of the renminbi would seem to be the largest agent in the market.


 

It appears that central banks are being proactive this time and not waiting for the first shoe to drop.

Since the 29th of September, Glencore, Europe’s commodity giant that I wrote about as being this year’s candidate for Lehman Bros., its stock is up 94% at 135, still well off its 52-week high of 339.

While a capital injection and/or going private were rumored it seems that buoying copper prices off their lowest prices in decades seem to have done the trick for the short term.

Ironically, like 2008 after Lehman ex-Morgan Stanley CEO John Mack is out everywhere blaming short sellers for the attack on Glencore. Mack is on the board of the commodity giant.

You’ll recall Mack vigorously defended Morgan Stanley in 2008 with his short sellers are killing the investment bank. It worked then, perhaps it will work now.

 

August's angst augurs agita

A quick update from the Catskills.

Anyone reading this blog for the last month, should not be surprised by stock sell off this week.

Global economic growth is cratering as we enter the currency wars of devaluing their currencies in the hopes of spurring growth through cheaper money.

These actions — of course — hurt the people using the currencies by reducing their buying power.

A 10 percent move down from stock’s June highs should be expected and 20 percent is not out of hand.

While Wall St. loves the idea of no September rate rise — another prediction from January that will come true — the reason behind kicking the can down the road, deflation/recession, scares the Street and Fed even more than a rate rise.

Look at crude prices heading to $39 a barrel for US WTI, falling off the cliff — due to little economic growth — as the canary in the oil pits for recessionary woes.

Crude Reality

By MICHAEL GRAY

Wall Street and Washington are playing a crude joke on the US economic recovery.

Higher gasoline prices have drained over $25 billion from the US economy since September, as skyrocketing oil costs have eaten into consumer’s wallets.

But the issue isn’t supply — it’s Ben Bernanke and hedge funds.

The Federal Reserve chief has kept the dollar weak with his “quantitative easing” stimulus plan. Wall Street sees commodities like oil as a security, a hedge on the watered-down greenback. They can run up oil prices on nothing more than speculation that China may suddenly need more oil.

Oil prices have hovered near $100 a barrel recently (though a disappointing jobs report brought it back down to $88 a barrel on Friday). OPEC is of course pleased with the high prices, and refuses to increase production — but privately, even they’re puzzled by the increase in prices. There hasn’t been a spike in the demand for oil recently; in fact, the recession has decreased use.

Yet New Yorkers pay more than $3.45 at the pump, and economists are forecasting $4 or even $5 a gallon gas by spring.

“That’s over a $145 billion annualized ‘hidden tax’ on the consumer,” says Peter Buetel, president of Cameron Hanover, who covers the oil industry.

“Gasoline prices at the pump have increased over 27 percent since Bernanke began telegraphing his move in September,” Buetel added.

Stephen Schork, an energy analyst who runs the Schork Report, wrote in a November posting that Bernanke’s easing started the run-up in crude oil through a weakened dollar. Then the fast money on the Street took the ball and ran with it.

But it isn’t as if the oil market suddenly had a switch turned on in September. Energy prices never really retreated during the recession, and some analysts believe the price of gasoline should now be more than a dollar lower than its current $3-plus average across the country.

While most of the equity cheerleaders have celebrated stocks’ year-end moves and said that gold and silver may be bubbles, crude oil prices have soared more than all other investments.

Precious metals were up 8 percent for the final quarter of 2010. The Standard & Poor’s 500 index gained 13 percent during the same period while crude, facing stiff headwinds of a stronger dollar as the euro weakened on Irish and Greek debt woes, gushed over 16 percent.

Cameron Hanover’s Buetel estimates that 40 percent of the run-up in crude prices by year’s end can be laid at the feet of Wall Street.

The crude reality for consumers is that this is the same Wall Street crowd chasing profits, which took crude prices to $147 a barrel in July of 2008, only to crater to $33 a barrel by December of that year as the fast money moved elsewhere.

It’s a big part — oil at $147 a barrel — of what exacerbated the recession in 2008.

“In a fragile economic recovery, $25 billion that does not buy movie tickets, pay restaurant bills or make a retail purchase could mean a longer time for economic recovery,” said Buetel.

Disappointing holiday retail sales bear this out.

Just this week Discover Card officials said that 47 percent of consumers spent less on gifts this holiday season because of higher gasoline prices and the sales figures from retailers showed declines across the board.

So where were the sales? Investors will likely get the answer when the oil companies report their earnings later this month.

Schork said that $90 a barrel translates into $3.15 a gallon and $95 a barrel to $3.30 gallon.

“At $95, we begin to see demand destruction,” said Schork, which means consumers cut back on gas purchases.

That has little effect on Wall Street banks and hedge funds that are bidding up the price to get a better return for their investors.

At the end of last year, Wall Street money mangers controlled 200 million barrels of oil in futures contracts. That level is five times the amount of oil Nymex controls in its Cushing, Okla., crude oil storage facility.

The Commodities Futures Trading Commission, under the FinReg rules passed last year. is charged with reining in Wall Street speculators by this month. But the panel will not have any subtenant rules until late spring at best.

mgray@nypost.com