Market Report: Fed Sets the Course for Commodity Fortunes

The Fed used to rise above the noise and confusion and give us a glimpse beyond the illusion. Yet gold was soaring ever higher and it flew to a high. The threat of bubbles was clear to a blind man. To not fear it to you'd have to be a mad man.

Masquerading as a committee with a reason, this policy is the charade of the season, and if they claim to be wiser, it surely means that they don't know. The markets are a sea of moving emotion, tossed about like a ship on the ocean. The Fed set the course for commodity fortunes and I hear their voices say: Carry on my carry trade. We'll be in pieces when it's done. Put your bearish thoughts to rest; don't you sell no more.

The Fed shows no fears of carry trades or bubbles or even inflation and gives the green light for the carry traders to carry on. No real talk of exit strategies as the Fed says that conditions will warrant exceptionally low levels of the federal funds rate for an extended period of time. The Fed is not worried about inflation as resource slack they think will save them yet the movement of the markets are eerily similar to the set up we had last year before the markets crashed.

For the oil market that means that oil is destined to at some point test the upper end of the trading range despite the fact that the disconnect between price and demand already seems to be playing havoc with certain segments of the oil industry. Yesterday's Energy Information Agency supply report was a perfect example.

Weak demand and high prices kept refinery runs well below normal coming in at 80.6 percent of their operable capacity last week. Imports of oil also fell, averaging 8.1 million barrels per day last week, down 764 thousand barrels per day from the previous week causing a big drop in crude supply. Why import crude if you are not planning on using it? The EIA reported that US crude oil inventories fell by 4.0 million barrels from the previous week. Yet still at 335.9 million barrels, U.S. crude oil inventories are near the upper limit of the average range for this time of year. Total motor gasoline inventories decreased by 0.3 million barrels last week, and are above the upper limit of the average range. We are swimming in distillates even though the EIA reported that distillate fuel inventories decreased by 0.4 million barrels. As far as total commercial petroleum inventories they decreased by 8.4 million barrels last week yet are still well above the upper limit of the average range for this time of year.

On the demand side the word is that the Energy Information Agency is going to lower its demand estimates. Yesterday Spencer Swartz of the Wall Street Journal reported that the International Energy Agency will make a substantial downward revision to its long-term forecast for global oil demand. That is the second year in a row that the IEA has done that. Swartz says that, "The forecast of slower growth in oil demand puts the IEA increasingly in a camp of contrarians bucking the popular view that crude demand will grow briskly in a post-recession world. That view holds that long-term demand will grow at a fast clip because of rising emerging-market wealth and consumption in places like China and India." "A drop in industrial activity from the recession is also a big factor in the revision. Baseline assumptions used in the previous long-term outlook have to be adjusted down to account for the tough economic conditions of the past year." The Journal says, "Last year, the IEA shaved 10 million barrels a day off its long-term forecast and projected consumption in 2030 would hit 106 million barrels a day, or about 25% above current levels. It isn't clear how that compares with the cuts expected in this year's forecast by the IEA."

As far as natural gas goes the Financial Times is reporting that the IEA will say the world faces a glut of natural gas that will force the US to scrap plans for new import terminals and mothball much of its existing capacity. The FT says that the IEA will predict over-capacity of gas pipelines and liquefied natural gas terminals will rise to at least 250bn cubic meters by 2015, more than four times the level of spare capacity in 2007. "Projected global demand points to significant underutilization of inter-regional pipeline and LNG capacity around the world. This looming glut could have far-reaching effects on gas pricing."