Liquids markets (crude oil and products) continued to surge last week on both sides of the Atlantic. There is a historical tendency for prices in the major finished markets (gasoline and diesel) to ebb at this point in the season, i.e. the time in between the U.S. Memorial Day and 04th of July holidays. However, given the technical momentum, the current market appears rather reluctant to abide by the seasonal script.
Last Friday July WTI on the NYMEX closed at 72.04. It was the first time in eight months that spot crude oil closed a week above the $70 benchmark. In the meantime this market has been turned completely inside-out. For example, in between mid-October and February, July WTI closed with a lower high/lower low than the previous day’s range in 42 out of 86 sessions. Since then the bears have only managed to accomplish this feat in 24 out of 82 sessions. Thus, if we were handicapping this event, the odds of this market closing bullishly collapsed from a near even money (48.8%) bet in the first four months to a solid 5:2 (29.3%) underdog in the last four months.
In other words, crude oil and products markets have morphed from a fundamental correction to a technical erection since October. The bull’s enthusiasm has been fueled (or is that fooled?) by the perception that less bad economic headlines can somehow underpin $75 crude oil in the midst of the greatest global economic contraction since the Great Depression.
We do concede the headlines have improved. But let’s keep it real, they have gone from fatal to disastrous. While that is an improvement, the news is still a ways away from even being miserable. For instance, most markets greeted the latest U.S. jobs report with glee… only 345,000 people were canned in May. If anyone reading this thinks that is good, please email us and tell us what color the sky is in your world. We would like to know. Yes, we do agree, slower job losses are certainly better than the alternative. Better still, new jobless claims are easing; the four-week average is now consistently coming in below the 20-week average for the first time in nearly two years.
Be that as it may, the amount of continuing claims rose to a 19th straight weekly record, 6.82 million. Thus, people are losing their jobs and they are staying out of work longer. Therefore, while the destruction of 345,000 jobs might be considered good (in opposite world), the U.S. unemployment rate jumped to a sixteen-year high of 9.4%. What’s more, the trend in unemployment insurance claims suggest the final unemployment rate will indeed hit double-digits and might even take out the November 1982 peak at 10.8%.
Additionally, last week’s Beige Book from the Feddid not inspire us. Bottom line, despite some signs of moderation in the economic contraction, the Fed reported that overall conditions were weak or deteriorated further during the period from mid-April through May. In other words, in reality less was more, i.e. the economy was in actuality more and not less bad last month… despite what the cognoscenti were telling us on TV.
Furthermore, it’s not any better for our friends in the north or across the Atlantic. The Canadian unemployment rate hit an eleven-year high in June, 8.4%. We just got back from Ontario (one of our favorite places in the world) and the anecdotes we heard from our industrial and power-gen clients re permanent demand destruction on the natural gas side were eye openers. Needless to say, after these conversations it is going to be that much harder for us to get bullish, the purge in rig counts notwithstanding.
Over in Europe the unemployment rate in April for the entire Euro-area was near a ten-year high, 9.2%. More importantly, April industrial production in the Euro-area plunged 21.6% from April 2008. It was the largest decline since records began in 1986.
Finally, on the other side of the globe the unemployment rate in Japan surged in June to a four-year high of 4.8%. Bottom line, unemployment rates are high and rising in the world’s largest economies, Euro-area, United States, Japan and Canada. These economies combined are nine times larger than China. Domestic stimulus has indeed stimulated domestic infrastructure growth in the People’s Republic, but that is only half the story. The other side of the country’s growth engine is stunted by the lack of demand for her exports. A good deal of this stimulus comes from the West and Japan whose economies account for around two-thirds of the globe’s share. China, whose economy accounts for around onefourteenth of the global share is obviously important, but the country cannot go it alone.
Therefore, the China excuse, so routinely touted by energy bulls, is specious.
Perhaps that is why Wall Street no longer appears to be so enamored with crude oil anymore? To wit, after topping out at 157,800,000 back in February, the number of shares outstanding on the crude oil exchanged-traded-fund (ETF), the United States Oil Fund, have dropped by 90,400,000 to the lowest level, 66,500,000 since the first week of the year, i.e. when spot WTI was trading in the low $40s.
Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.