Market Report: Petroleum Complex Up on Confidence

The petroleum complex soared for a lot of reasons but confidence may be the best reason. Oil and its price are not just a reflection of supply and demand but also a reflection of confidence. Such as confidence in the economy or even more importantly confidence in the currency it is traded in as well as the confidence in the ability of certain countries around the globe and their ability to pay off debts.

Oh sure, the list of reasons that caused oil to go up were many. You can start with the fact that Greece did not default on anything over the weekend but also because it appears that Greece can somehow restructure their debt and may not need a bailout after all. At least that is what the Greek Prime Minister said. That was good news for the euro currency traders who at first seemed to want a detailed bailout for Greece but actually seemed to have second thoughts about how this might impact the integrity of the currency as a whole. Renewed confidence in the Euro helped tank the dollar causing a surge in dollar denominated commodities across the board. We also had strong economic data in Japan followed up by a stronger than expected ISM manufacturing number which always seems to bode well for future energy demand.

It's all very bullish in the short run and despite the meteoric rise in oil on Tuesday, there are warning signs that this price level may be unsustainable. Take for example the report that came out yesterday about the foreign participation in our debt. As reported by the AP, the US Treasury reported a record drop in foreign holdings of U.S. Treasury bills in December. The Treasury Department said foreign holdings of U.S. Treasury bills fell by a record $53 billion in December. That topped the previous record drop of $44.5 billion in April 2009. This raised concerns that China was making good on its threats to sell off US treasuries holdings. The AP said that China reduced its stake and lost the position it's held for more than a year as the largest foreign holder of US treasury debt. Japan retook the top spot as it boosted its treasury holdings.

If China is dumping treasuries it may explain in part why China is buying more oil than they are using. If China continues to diversify away from US treasuries, it should give commodities a boost. Yet that boost should not last. If the trend continues the US will have to raise interest rates faster than they want which in turn will be very bullish for the dollar and very bearish for the price of oil. If the US treasury wants to make sure it can cover its debt load, rates will have to go up so treasuries can compete with the allure of putting your money in oil or gold or private equity.

The AP reported that Moody's Investors Service has warned that the U.S. government's top credit rating could be jeopardized if the nation's finances don't improve. Asked about this report, Treasury Secretary Timothy Geithner said this month he was confident the United States "will never" lose its sterling credit rating. He predicted foreigners would keep buying U.S. Treasuries as a safe investment. Are these all just precursors to the inevitable rate rise that we all know is coming? Is the market and the Fed just too complacent about the expected time that rates could rise?

In the meantime the outlook for global supply continues to improve. The AP and the Wall Street Journal today reported that Exxon Mobil Corp. said it added 2 billion barrels of oil equivalent to its proved reserves in 2009, the highest gain in the decade and a 33 percent rise above last year's addition. The AP said, "the world's largest publicly traded oil company reaped the benefits of its aggressive exploration and production strategy, which led the industry in capital spending amid a recession that forced many peers to cut back. The company said it replaced 133 percent of its 2009 production." Hey Peak oil guys! This is not supposed to happen? Is it?