Storm Flurry Passes

Jim Brown
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A total of six storms and potential storms sprang up over the last ten days and now there are only three left.

Hurricane Ingrid is heading for the Mexican coast with winds at 75 mph. There should not be any risk to the U.S. oil patch unless conditions change dramatically. At the same time tropical storm Manuel is bearing down on the western coast of Mexico. The combination of these two storms making landfall on Mexico at the same time is going to be monsoon type rains. Forecasters are predicting 12-18 inches of rain, massive mud slides and locally heavy winds.

Oil work in the Mexican Bay of Campeche or southwestern Gulf of Mexico has been halted. There are no air or sea operations until the storm passes. No material damage to oil facilities is expected.

Hurricane Humberto has diminished to an organized low pressure area in the center of the Atlantic and moving north. It is no danger to any landmass.

There are no potential storms on the horizon for the next seven days. There is no reason for oil and gas prices in the U.S. to be elevated as a result of weather.

In the image below Ingrid is on the right and Manuel is on the left.

U.S. drivers constantly complain about pain at the pump. The national average for gasoline is $3.46 per gallon even with the current oil prices elevated well over $100. We should quit complaining and count our blessings. The U.S. only ranks 50th in the world in terms of price.

The highest is Norway at $10.08. Drivers in Turkey pay $9.55, Japan $5.90 and China $4.67. If you want really cheap gas move to Venezuela where it is 4-cents per gallon. The Venezuelan government subsidizes gasoline to stimulate the economy and keep the rulers in power. Of course to enable the government to have the money to subsidize gasoline it had to take over all the major industries including power generation, telephones, oil production, banking, etc, and they are still running out of money. You can't maintain artificial prices forever. The economy will eventually crash even worse than it is now and the ruling party will be thrown out.

In the U.S. Goldman Sachs said gold may drop below $1,000 per ounce. With the Fed about to cut QE while claiming the economy is growing the "risk" trade in gold is evaporating. That is even truer after the attack on Syria was cancelled. Goldman's head of commodities research, Jeffrey Currie, said gold will continue to decline into 2014 with his support target at $1,050. His mid cycle target is $1,200 but he acknowledged gold can easily overshoot in declines and advances.

He warned that once a timetable for tapering is known there will be a fresh selling wave in the ETFs. Gold is seen as disaster insurance and as a hedge against inflation. There is no inflation at present with the trailing 12 month rate at only +1.2%. The Fed has yet to prove its case for an economy improving at anything more than a snail's pace but at least we are not yet in another recession. That may be around the next corner with the GDP in a slow decline. Until then gold should remain under pressure.

The Syrian deal Kerry struck with Russia requires Assad to produce a comprehensive list of weapons stockpiles within a week. This is the list of weapons he claimed he did not have three weeks ago. Those have to be turned over to an international group or secured in place until they can be destroyed by mid 2014. Any failures in this process can result in UN sanctions not US attacks.

This has so many holes it is laughable. The only upside is that President Obama got a free pass on his red line problem. The military option is off the table and there will be no embarrassing vote in the House and Senate.

Assad can now pick and choose which weapons he wants to keep and which he is willing to sacrifice as an offering of penance to the international community. If he is later found to have kept some he can claim the fog of war for their "inadvertent" omission. Even if there is a blatant fraud his worst penalty will be a slap on the nose with the rolled up paper of a UN sanction. Like a dog in trouble he will slink away for a week or two and then go right back to whatever dirty deed he was doing.

Putin and Assad must have had a good laugh over this one. President Obama crawled too far out on the red line limb and Putin cut it off. The U.S. standing in the Middle East declined and Russia's went up.

I am not a fan of the situation the president stumbled into. There was no easy out. Had he gotten permission to bomb Syria months ago when they first started using chemical weapons then he could have responded instantly after the big attack and there would have been a real penalty for Assad. That option is no longer valid and I suspect Assad could use chemical weapons on a weekly basis now and the president would look the other way rather than put himself back into a box.

The market is likely to rise on Monday because low information traders only see the headlines and react accordingly. After Monday the headline will fade and the rest of the September headlines will grow in numbers and severity. That will be the real challenge for the market over the next two weeks.

Jim Brown

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