Bullet Proof Oil

Jim Brown
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The price of WTI declined -$3 intraday on Friday but recovered all of it before the close. For now the $96 level appears to be resistance but WTI is sticking very close.

It is hard to believe we dipped to $86 just three weeks ago. It is even harder to understand why WTI is behaving so strongly in the face of 22 year highs in inventories and 18 year high in U.S. production. I know the conventional wisdom blames the gain in jobs and expectations for economic growth for the gains but this is crazy.

The macroeconomic news continues to be terrible with dozens of reports missing estimates over the last month. It is as though oil prices are operating under the same ignorance of fundamentals as equities. You can blame it on QE with too much money chasing too few assets but the strength in the dollar should be weighing on prices.

Even the news from OPEC failed to blunt the rally. OPEC said production rose to the highest in five months after Saudi Arabia boosted output in April. OPEC said it produced 30.46 million barrels per day in April, up from 30.18 in March. That was the highest production since November. With Brent prices dipping to $104 and just barely over the $100 level that Saudi Arabia called reasonable you would have expected production to fade slightly rather than rally.

Saudi Arabia pumped 9.31 mbpd in April, up from 9.13 mbpd. Schlumberger and Baker Hughes have both said Saudi is adding more rigs even though they claim to have 2.5 mbpd of excess capacity already. It seems strange to be increasing rig counts with so much production currently turned off. It may simply be a case of needing a certain kind of oil and having too much of oil grades that nobody wants.

OPEC expects oil demand to grow by 800,000 bpd to 89.66 mbpd in 2013. That is +100,000 bpd higher than the prior month's estimate. Daily demand for OPEC oil is expected to reach 29.84 mbpd, down from 30.23 mbpd in 2012. The rapid increase in production in the U.S. is offsetting the demand for OPEC crude.

The IEA will release its monthly and medium-term oil market reports on Tuesday.

Oil prices should be declining because oil cargoes are going unsold. Nigeria said it had 20 crude cargoes loading in June that had not been sold. Nigeria offered 66 cargoes for June totaling 1.94 mbpd. Angola said it had four cargoes for loading in June still unsold out of a total of 51. Angola is currently exporting 1.83 mbpd but that will drop to 1.63 mbpd in June. That is the lowest in nine months.

Goldman said it saw the spread between WTI and Brent narrowing further as U.S. imports continue to shrink. The strength in the dollar and weakness in the Euro is also a contributing factor. Brent for June delivery traded down to $101.56 intraday on Friday. It is trading at $103.11 late Sunday night. The June contract expires this Wednesday. The July contract is $102.86 today after dipping to $101.39 on Friday.

The violence currently spreading from Syria is also supporting oil prices but very little at this point. The Brent prices should be most affected and with them dipping towards $100 the fear trade appears to be slipping.

Precious Metals

Dowa Holdings, Japan's biggest silver producer, said it will raise output by 40% in 2013 to meet rising demand for use in solar panels. The company plans to mine 500 metric tons of silver in 2013, up from 357 tons in 2012. That will be the most silver they have produced since 2006. Japan is expected to be the second largest solar market by year end. Silver imports from Chile will also be increased. Dowa has the capacity to produce 800 tons from a combination of scrap, imported ore and intermediate products. They are the world's largest supplier of silver powder for use in solar panels. Global demand for silver powder is expected to rise by 44% to 3,900 tons in 2014. About 90% of the most commonly used solar panels use silver according to the Silver Institute and that accounted for 6.9% of all silver demand in 2011. The institute expects solar demand to rise to more than 100 million ounces in 2015. In a survey of 14 analysts by Bloomberg the price of silver is expected to average $31.25 an ounce by Q4.

Silver Chart

Gold prices were hit by a strong intraday dip of more than $50 on the strength in the dollar. The dip was bought but the rebound only recovered $30 dollars of the losses. Multiple analysts and fund managers were turning bullish on gold last week but you can't tell it from the price. The dollar rallied to a five week high and commodities were crushed.

However, hardly a day goes by without a story on increasing demand around the world. The drop in prices has created a feeding frenzy in China and India. Indian demand exceeded 100 tons in April and shipments in May are expected to top that. India imported more than 860 tons o gold last year. China's imports rose +26% in Q1. The drop in prices came as investors pulled a record $20.8 billion from bullion funds. That pushed holdings in exchange traded funds backed by bullion to the lowest since July 2011.

BlackRock's president Robert Kapito said on May 9th he is still bullish on gold and would buy it at these prices. "The world did not end and people gave up on the gold trade." This was capitulation and investors will come back when the global economy picks up and gold demand increases. BlackRock is the top investor in the iShares gold trust (IAU).

John Paulson, the biggest investor in the SPDR Gold Shares (GLD) said last week he was still bullish on gold even after his gold holdings declined by -27% so far in 2013.

Gold Chart

Natural Gas

Natural gas prices are finally starting to fade. Injections into storage totaled 88 Bcf last week and the largest this year. This shows that when the spring weather improves even more we are easily going to have 100+ Bcf injections. It will not take but a few weeks to see storage levels back in the normal range and growing.

The $3.90 level is currently support but it is likely to fail this week. How far and how fast it will decline after that support break is yet to be seen.

Nat Gas Futures Chart


Iran moves back to the headlines this week. They meet with the IAEA on the 15th and it is very doubtful anything will be accomplished. Registration for the June 14th presidential election closed on Friday. Ahmadinejad can't run for election again and he has lost favor with the Supreme Leader so it would not do him any good anyway. More than 360 presidential hopefuls signed up to be candidates. However, the Guardian Council, half of the members are clerics appointed by the Supreme Leader Ayatollah Ali Khamenei, will screen candidates based on their qualifications and loyalty to the Islamic Republic. Only about ten will be approved to be candidates. That list will be posted on May 22nd. Don't expect any big changes because Khamenei is only going to allow candidates that will follow his instructions.

After the June 14th election the risk of Israeli attack will increase. They will want to wait and take advantage of the new guy before he has a chance to form alliances and get accustomed to his new office.


The major indexes closed at new highs again on Friday. However, the S&P futures opened -6 points lower on Sunday night and have dipped to -8 temporarily. The Q1 earnings cycle is basically over and the lull we had in economic reports last week is over. It is back to business as usual for the market.

The rising dollar will continue to be a challenge. Eventually we are going to have a market dip that last more than a couple hours but for now the trend is intact. Be very cautious of being "too long" and having too many positions. When the decline appears it may not be orderly and making decisions on dozens of positions at one time with the market in turmoil is a good recipe for losing money. Be patient, wait for a decent dip to add new positions.

Jim Brown

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