Market Report: Threat of 'Reverse Repos' Move Markets

It was the threat of reverse repos that moved the markets with a momentary jolt.

Is Ben Bernanke a repo man? Reverse repos are when the Fed moves to take dollars out of the system by offering securities to certain market participants with a promise to buy them back at a later time and at a higher price. This withdraws cash from the system and takes those freshly printed dollars off of the street. The street by the way expects that the Fed will withdraw close to 500 billion of those crisp little bills when the timing is right. That timing is critical for an oil market that is fixated on the dollar' fate making the timing of the Fed' exit strategy from emergency monetary accommodation and printed money is the major factor that will determine the next major move in oil.

Yesterday, the market thought the Fed was already starting to make that move when the Fed said they were conducting a test. This is a test and only a test of the reverse repo system. If this were an actually reverse repo, traders would be informed to scramble to get out of their long positions in gold, oil and every other commodity that has been influenced by persistent dollar weakness. The Fed said that this test should in no know way have implications on monetary policy or even the timing as such but for a moment some traders were not so sure.

Of course the traders should not have been surprised as the Fed announced their intention to do these tests last week. Still obviously if they are getting prepared we know that day is getting closer. Federal Reserve Chairman Ben Bernanke himself has acknowledged that the timing of exit strategy is critical by saying that, "We have a difficult fiscal situation and Washington understands developing a sustainable way out is critically important in order to maintain confidence in our economy and confidence in our currency." Good luck on that one, Ben, because as Bud says in the movie Repo Man quite rightly, "a repo man spends his life getting into tense situations." Getting out of them is the key.

What might really get intense is this winter. Winter forecasts are downright chilling. Reuter's news reports that the "Commodity Weather Group" is calling for its coldest winter since the 1980s. They say that a weak El Nino cycle may usher in the coldest winter this decade in Eastern North America, the biggest regional consumer of heating oil. The CWG says that, "On a U.S. national basis, the 2009-2010 winter months may be the coldest since the early 1980s. A weak El Nino cycle, which occurs when waters are up to 0.5 to 1 degree Celsius warmer than normal in the Central Pacific, looks most likely and usually translates into a colder-than-normal winter in Eastern North America. As far as the rest of the country the CWG outlook called for temperatures in the U.S. Midwest to be moderately lower than normal, and temperatures in western states to be higher than normal." CWG said it favored the weak El Nino outlook, but there was a small chance El Nino could dissipate or strengthen into a moderate cycle. If El Nino strengthens, it may lead to a warmer-than-usual winter in the U.S. Midwest, CWG said. CWG said variables like a "collapsed" El Nino (15 percent) or a strong El Nino (25 percent) could change the weather outcome, as told to Reuters news.

The contango in RBOB gasoline is widening. The current glut of supply is giving way to fears that low refining margins will tighten the current oversupply in the near future.

Overall the weak fundamentals in the oil market still exist except for the weak dollar. I know I have to remind people that a weak dollar is indeed a fundamental. In fact, it is perhaps the major fundamental that is influencing price.