Ralph Shell @ 1:02 PM, Wednesday February 23 2011
Unrest in the Mid-East and Africa has brought out a cacophony of alarmist, some claiming that oil is headed for $200, and maybe $300 or $400/ barrel. One journalist, Arnaud de Borchgrave, tells Newsmax, " the increasingly volatile situation in the Middle East could push the
price of oil quickly to $300 or even $400 a barrel.
De Borchgrave, who has interviewed Moammar Gadhafi six times, also says
the Libyan leader is manic-depressive who is going through a manic
phrase where he is “taking on the world.”
Read more on
Newsmax.com:
De
Borchgrave: Mideast $400 Oil Imminent With Mideast Upheaval
With headlines like these, it is no surprise that crude has taken off, although the the price discovery mechanism of the oil market is archaic. Why, for example, is the price quoted in barrels? Are there actually many barrels containing oil? Brent crude is the name of the North Sea oil field developed years ago. Despite declining importance as a global supply of crude, it remains as a benchmark for the pricing of Mid-East oil heading for the new markets in Asia.
In the US, the benchmark for oil pricing is West Texas Intermediate (WTI) Crude, but the bulk of this oil no longer comes from Texas. The spread between the WTI to Brent has historically been small, but recently it has widened to as much as $15/Barrel. During the past year there have been two new pipelines pumping Canadian oil down to the Midwest. Further the ever expanding production in the Williston basin, probably now approaching 500k/barrels per day is adding to the Midwest supply glut. While this may be beneficial to the refining margins, this small surplus of oil is not likely to interrupt the oil specs bull party.
Oil and refined products are included in the major commodity index funds. If you examine the CFTC COT report, the non reportable small spec positions amount to only 4.6% of the Crude Oil Light Sweet long and 2.5% of
the short. With the total open interest 2,803,419 contracts, this market is truly the playground for the big boys.
Unsettling is the fact that the oil market strength, during the late winter, is far in advance of the peak North American summer driving season. This contra seasonal strength may be the proverbial canary in the mine, a warning of some bumpy economic roads and higher oil prices ahead.
Speculators at the CME have favored the long side of the C$, and according to the last COT report carried a long in excess of 100k contracts. Usually there is a positive correlation between the oil price and the loonie but the relationship has been relationship this week has been tenuous. This week's robust energy rally has failed to support the loonie, a quandary for the bulls. After trading at 98.20 on Monday, the C$ has weakened to .9950, currently trading at .9925.
There are a couple of reasons for the unexpected C$ weakness. First, there were simply too many specs long the loonie and short the USD. There was also bear Canadian economy news yesterday, Canadian retail sales were shy of expectations, and that got a sell off started. Another problems for the Canadians, is they live next to a country whose currency is very unpopular, and some of the USD bearishness may be casting a negative feeling toward the C$. We think the weakness in the Canadian will be short lived, and the possibility of higher crude prices will keep the C$ buoyant. Use further liquidation in the .9950 to even area to sell the USD and buy the CAD.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.