Tuesday, August 9, 2011


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Oil reversed its decline on Tuesday in volatile trading as the Federal Reserve promised to extend near-zero interest rates for two more years, fueling a late Wall Street rally and dollar slump.

The Federal Reserve signaled an extended period of diminished, if not negative, economic growth. This bodes poorly for demand, but may indicate additional easing measures, which we know from recent experience is supportive of asset prices, especially commodities.

Ahead of the Fed comments, OPEC and the U.S. Energy Information Administration cut demand growth forecasts for 2011 in separate monthly reports.

OPEC's expected oil demand growth increase for 2011 was lowered by 150,000 barrels per day (bpd) from the previous report to 1.21 million bpd, while the view for 2012 was lowered only marginally, by 20,000 bpd to 1.30 million bpd.

The EIA cut its 2011 demand growth forecast by 60,000 bpd but raised its 2012 forecast.

U.S. crude oil stockpiles fell 5.2 million barrels last week, the industry group American Petroleum said late on Tuesday, against a forecast for stocks to be down.

Gasoline stocks fell 1.0 million barrels and distillate inventories fell 558,000 barrels, the API said.
U.S. crude stocks were estimated to be up 1.5 million barrels, according to a Reuters survey of analysts ahead of the API report.
Distillate stocks were expected to be up 1.1 million barrels and gasoline inventories up 500,000 barrels. LINK

So why did commodities fall so hard and so fast? Did demand all of a sudden change that fast?!

Hedge funds are down 14% to 16% year to date according to Anthony Scaramucci, managing partner at Skybridge Capital. These funds have been crushed and withdrawal requests were already heavy and they are accelerating. They are being forced to sell anything in sight to raise cash.

The decline in equities has been so severe that investors have had to dump commodity positions to raise cash. About the only commodity posting gains is gold, now considered a currency than a commodity. Other commodities like copper, oil, grains, etc have been hit hard. Fundamentals no longer matter when you are covering margin calls. It is simply a mad rush to the exits to preserve any remaining capital.
Does anybody really believe demand is going to decline that much? The U.S. is adding 1.0 million autos on the road per month and China is still adding about 1.2 million cars. China will add 19 million vehicles in 2011, up from 8.1 million in 2007. Globally J.D. Power & Associates claims we will add 76.5 million new vehicles in 2011 compared to 72.0 million in 2010. In 2012 that is expected to rise to 85.0 million and 91.0 million in 2013. By 2015 sales of new vehicles will surpass 100 million a year. Also in 2015 India will be the third largest market with Brazil in fourth position.
 Doug Kass on CNBC said the market has put in a bottom for the remainder of the year. LINK

ITZ believes the energy sector will be a leader in that rebound. Nothing changed in the global demand  picture. Demand is still rising although it may be rising at a slightly slower rate than it was a month ago. When the U.S. economy does begin to accelerate that demand will also increase.
ITZ was a bit early in the Proshares Ultra Crude Oil (UCO) call...but oil is oversold and this is an opportunity  to make money.

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