Market Report: GDP & OPEC Cheats Drive Oil

Oil prices bucked the deflationary commodity trend with a late session turnaround as traders moved to cover positions the day before the June futures contract expiration. Some traders credited the turnaround in the market to what seemed to be an increasingly optimistic Federal Reserve that raised their economic growth expectations in the release of its Fed Minutes. The Fed said in the Minutes from the FOMC meeting last April that GDP growth would range to 3.2% to 3.7% which was up from a previous forecast range of 2.8% -3.5%. The Fed also lowered its forecast for unemployment from a range of 9.5%-9.7% to a range of 9.1%-9.5%. Of course one has to remember that these forecasts were made before the depth and gravity of the European financial crisis was clear to the market. Oh sure, the Fed did mention that the Greece crisis could impair US Markets but I do not think that they realized how bad the situation was at that time.

If the turnaround in oil was all about growth expectations then why did we not see more confidence in buying some of the other commodities? Unless of course you assume that oil is going to be a leading indicator of economic growth. And the other reason we saw a snap back was due to the fact that oil is over sold. The month of May has not been kind to oil bulls as prices have plunged from approximately 8715 to a low of approximately 6790 yesterday and it has not been kind to OPEC that is starting to take notice as their dreams of $75 a barrel oil are being shattered.

It was reported that Jose Botelho de Vasconcelos, the Oil Minister of Angola one of the smaller members of the OPEC, said OPEC would need to call an extraordinary meeting if prices continued to fall. "As crude oil prices breached the $70 per barrel area, it is likely that OPEC will have to discuss the level of production quotas in order to support crude oil prices in the near term." Of course OPEC has been benefiting from the fallout from the economic crisis as global central banks have helped support oil prices by their economic policies. OPEC is partly to blame for the price drop due to their cheating ways and have once again contributed to a big price drop. As OPEC has been raising production the demand for their oil was falling. The International Energy Agency said that last week that the demand for OPEC oil should be 28.7 million barrels per day which is 400,000 barrels a day less than previously forecast. At the same time the IEA reported that OPEC compliance with supply cuts "slipped" to 54 percent in April.

Now do you want to guess who were the biggest cheaters, according to the International Energy Agency, that caused those numbers to slip? Did you guess Iran? Yes, that's right - Iran! I know you are shocked because Iran has a reputation of being so trustworthy. It seems Iran wanted to sell as much oil as they can just in case they are hit by international sanctions. But based on reports of who they are selling oil to, I do not know why they are worried.

The Wall Street Journal today blows the lid off how oil trade with Iran is going down and how some oil companies want to hide what they are doing. The Wall Street Journal reports, "An oil tanker named Front Page, chartered by Royal Dutch Shell PLC, left this port on March 17 and reported it was going to another U.A.E. port, then on to Saudi Arabia, ship-tracking data show." But the tracking information reveals that Front Page also made an unreported stop to the coast of Iran. There it loaded Iranian oil, according to records obtained by oil traders and shipping sources. The incident, some oil-industry experts say, is an example of how some companies these days are hiding their business dealings with Iran, even when they are perfectly legal because they aren't subject to any sanctions. Another oil tanker that stopped in Iran in March. Oil traders say the tanker was chartered by Total SA of France and it's reported they turned off the tracking transponder throughout the visit, according to ship-tracking data.

The Journal goes on to say that, "None of the current sanctions proposals in the United Nations or the U.S., including the latest ones agreed to this week by the U.S., Russia and China, would target Iran's oil-export business, which generates about half of its government revenues. Doing so, experts say, likely would drive up the commodity's price world-wide and result in higher gasoline prices in the U.S., of as much as $1 more a gallon, even though the U.S. doesn't import any Iranian oil. U.S. officials also fear that targeting Iranian crude could wreak havoc on the recession-ravaged economies of allies like Japan, which last year imported about 421,000 barrels of Iranian crude a day, just behind China and India. As a result, companies like Shell and BP PLC continue to do a brisk business buying Iranian oil products." BP declined to comment.

As far as yesterday's oil inventory report from the Energy Information Agency goes, the key issue that traders wanted to know was whether oil supply would fall in the NYMEX delivery point in Cushing, Oklahoma. The answer was no. Over all the EIA reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 0.2 million barrels from the previous week. At 362.7 million barrels that puts supply 6.5% percent above the five year average. Total motor gasoline inventories decreased by 0.3 million barrels last week but are still a whopping 6 percent above the five year average. But that is nothing compared to distillate supply which decreased by 1.0 million barrels but are still a mountainous 25.1% above the five year average.