Friday, June 6, 2008

Friday Morning Wildness

Whoa! A week or so ago I wrote here about how the (then) rising price of crude was not primarily a supply/demand issue but, rather, was a way to play the US$ weakness. I implied that the crude oil market had made a top at 135.09 on May 22nd. The timing of those remarks were pretty good-- hey, even a dart-throwin' monkey hits the target every now and then. Oil dropped about 10 percent from that point until, well, until this morning's May non-farm payroll numbers came out. More importantly, the household employment survey came out and showed our low unemployment numbers jumping abruptly from 5% to 5.5%.

Now how on Earth does an unemployment figure cause oil prices to soar? In fact, if more people are supposedly out of work, doesn't that mean oil should drop in price instead of leap $7 per barrel like it did on this morning's news-- since there should be less demand after all? Well, loyal reader(s), what's happening this morning is proof, if you still needed it, that high oil prices are linked more to the weak dollar than to any "peak oil" or Schumer's Saudi scare. Think about it. Did demand soar overnight? No. Did supply fall off somewhere? Just the usual, no. So, what happened to cause oil to retrace most everything it had lost in two weeks at this morning's opening bell? Here's an outline:

- crude oil hit a high of $135.09 on 5/22 and faltered at that price

- the stock market, not coincidentally, went into a technical correction the day before after several days of selling-- this looked like big money managers reallocating portfolios

- the dollar strengthened against other currencies generally over the next two weeks- the fed was signalling that they were inflation-fighter mode now

- another way to play a strengthening dollar is to sell (and sell short) commodities, therefore oil plunged

- oil fell below $123/bbl on June 4th during the trading day (I'm looking at my intra-day trading notes not a chart) that quick of an oil price correction probably meant some large short positions were coming in on crude oil driving it down nearly 10% in two weeks

- at 8:30AM EDT today the May non-farm payroll and unemployment numbers were released

- that data was read to be very bearish for the general economy meaning the federal reserve would NOT be able to start raising interest rates and strengthening the dollar

- the above data point means NO inflation fighting from the fed... sooooo stock futures reduced downward sharply, the strengthening dollar sold off abruptly and, say it with me now, the people shorting crude oil covered their short positions... boom-- oil flies instantly to $134.50

Supply and demand? Don't make me laugh. Traders moving pretty damn fast for a June Friday? You betchyerazz. Don't worry Jake, it's Chinatown. Ooops, I mean, it's market action, baby! We live for this! And the word of the day on Wall Street TV... IT'S GOING TO $150!!! Run for your lives!!! They are herding up the sheep right now on CNBC and the sheep are sprinting towards the shearing barn. The pulse quickens.

Now, think about this tiny little bit of news about that supposedly horrible unemployment data: it calculated graduating kids from high school/ college differently than usual, thus the jump from 5% to 5.5%. My guess is there will be some "smoothing" of that number in the next couple of months. So the fed might not be knocked off the inflation-fighting, tightening track at all. Make sure you're on the "right side of the trade." Today, I am. But it's hard work being there and staying there in a volatile market. This ain't the late 90's when any dart-throwin' monkey could buy Intel or Cisco and look smart.

Watch to see if oil breaks above $135.09 today and STAYS ABOVE IT AT THE CLOSE. That will be the most important number today methinks.
UPDATE: Resistance at $135.09 held through the morning but around 1PM the price of crude broke through that level. When it did it, of course, rapidly advanced to just under $140. Remember, a couple of days ago it was trading at $122 and change. (Hint: That's got all the makings of a run.) Clearly the short positions that were taken over the past few weeks were covered today. Here's the quiz question though: will that short-covering rally continue next week and turn into further gains or will it collapse? Would you BUY crude oil at $138.84 per barrel knowing it was in the 80's just last February? If so you were the kind of "investor" who bought AOL right when Time Warner was buying her. Good luck.
UPDATE2:There's a gigantic, worldwide game of chicken going on-- this has very little to do with "supply disruptions", "sabre rattling" or "demand from China." Those things have all been in place for a long time. No, this is about two opposing trading positions battling it out for supremacy. The best place for you? In the La-Z-Boy with a tub of buttered popcorn watching it play out. Will the bull forces drive the world into an economic collapse? Will the oil bears win the day and drive crude oil down to 80, 70, 60....? I love this game!