Slingers parsed Ben Bernocchio’s brief comments Wednesday to put in play another sloppy, kinetic gold short attack.
“We will reduce our bond purchases in the future, like we have always said, but, it may not be exactly when you think it is. Depending on data, it may be sooner, or later. We will do what is best for the economy, as determined by the markets at the time,” Bernocchio said.
With this type of obtuse drivel, anyone can be a six-figure speech writer.
One of the reasons I am so bullish on (PM) mining shares is because I believe that the output is going to dramatically outperform one of the key cost components: oil, and thereby fuel. My preferred play is the PM stocks — not to short oil. When the price of oil retreats, it will turbocharge PM stocks. I wouldn’t short oil directly because of Iran. Trouble there would spike oil and gold, so PM equities are the play. However, I feel the window has already closed on preventing Iran from possessing smaller nukes. Fiat accompli.
The extreme speculative bullish position in oil is the counter-trade of the extreme speculative bearish PM position. Essentially, the same managed money traders and speculators have piled into oil to almost the same extent they have liquidated and shorted PMs. Given the lax regulatory oversight, these are just too inviting for the large players, who in turn get themselves in hot water. The oil market is a paper/electronic market that is manipulated by a few powerful investment banks and hedge funds, distorting prices in the actual physical oil and gasoline markets. Does this sound familiar?
Commitment of Traders Crude Oil Positioning (BarCharts.com)
Hedge funds and other large speculators held a net long position of 305,392 contracts during the week ending Tuesday, according to the most recent report. Managed money Boyz held the largest long positions ever at 256,824 contracts.
Oil inventories are at 367 million, which is well above the average peak demand for this time of year. Some suspect that this extra inventory may be afloat on tankers. What happens to supplies when the slower part of the demand cycle kicks in for petroleum products?
Gasoline supplies are well above where they were last year at this time. Distillates are slightly ahead of last year’s inventory levels for same period. The production of high-quality U.S. oil is rising, but the nation’s refineries are not prepared to process it into gasoline, adding to the glut.
Chart Source: Energy Information Agency
For all that talk about added pipelines coming out of Cushing to alleviating the glut, there has actually been a very modest decrease in inventories. Last year, Cushing had 46.3 million barrels in storage, and today it has 46.1 million.
As far as the large economic contraction in the BRIC countries, oil is where the selling should be taking place — not precious metals. Unlike PMs, in which demand is surging, oil is headed the other direction. Although government sources like EIA are still calling for non-OPEC consumption growth, they are running poor models calling for a rebound in the second half of GDP growth. Instead, it will be the opposite.
Although I have identified Egypt (and South Africa) as serious situations, this won’t end up resulting in any supply disruption — or at least any disruption that offsets the decent supply levels of global crude. If anything these troubles will contribute to reduced, almost Mad Max demand for fuel.
The timing of the drop can’t be exact, as we are still in hurricane season. But as this passes, and the global economic weakness becomes obvious, look for this trade to be rapidly liquidated.