Morning Petrospective – September 22, 2011

ell, we were wrong in our appraisal last night that the Fed would not do anything. It did not end up hurting us, but the Fed actually sprung a surprise – of sorts – on us all. It is possible that Wednesday was when the Fed realized it was going to implement the twist, a program that sells nearer maturities and uses the proceeds to buy longer-dated bonds. But, because the Fed Funds rate is at zero, the impact of selling nearby is negligible. Ultimately, the twist lowers longer-term interest rates – slightly.

Trading was choppy on Wednesday as traders had a number of factors to reconcile. By the final bell, crude oil prices were down a dollar – despite a very large decline in crude oil inventories in this week’s DOE report. The DJIA dropped 283.82 to 11,124.84, and it seems to be in position to challenge its lows for the year, soon. More significantly, though, where QE2 had been seen as being bullish for equities, this fell on deaf ears, as far as buying went. Some were disappointed, some thought it did not go far enough, some felt the Fed should leave well enough alone and some sad that it would be forgotten as so much background noise in a week or two. No one hailed it as the financial breakthrough to economic recovery that would be seen as the Holy Grail here. Few believe such a grail exists … for this economy, now, at least. In a nutshell, Operation Twist involves buying $400 billion worth of long-dated treasuries. Everyone agrees on that much. But, after that, everyone becomes Goldilocks. For the Republicans (mostly) it is too much. For the Democrats (mostly) it is too little. Few think it’s “just right.”

Oil prices were lower despite this new form of quantitative easing, which tells us that the economy may be weaker than one would have hoped. Many observers felt that prices of equities were lower after Operation Twist because it was accompanied by the latest Fed’s vision of the economy, which was hardly robust. Clearly, we will need to monitor these markets for any revision in their current reaction to this initiative, but right now, equities and assets have decided that this is not QE3.

The US dollar was higher on Wednesday, and it finished near the day’s highs in an outside trading day. That is bullish, especially when one looks at the longer-term charts, which show a major upside breakout after an extended foundation. The dollar’s reaction to Operation Twist has been the opposite of what we would have predicted; the dollar looks stronger after it, which makes little sense. It seems to be telling us that investors had already discounted a larger quantitative easing program. That would go a long way towards explaining the resilience of oil prices over the last few months.

This week’s DOE report showed a much larger than predicted decline in crude oil inventories, which leaves us with the fewest days of forward use for six months. Distillate stocks were lower and gasoline stocks were up a lot more than anticipated. Refinery utilization was up 1.3% to 88.3%, which highlights strong refiner margins.

FMX Newswire

FMX Newswire is an overnight news summary designed to meet the needs of professional energy traders. The content is to-the point, professional grade and not widely reported in the mainstream media. All sources are professional respected firms and newspapers.

Bentek Energy

• Power Burn Analytic Report – Coal vs. Gas-Fired Generation Spread Widens to More than $5 per Month.
• Industrial End Users Analytic Report – Northeast Region Leads Slight Rise in Sample of Overall Demand.
• Supply/Demand Balance Analytic Report – Prompt NYMEX Pushes to New Lows on Weak Shoulder Season Demand.
• Nuclear Plant Status Analytic Report – Palisades 01 Reaches Full Utilization.

Platts

• China's oil demand continues to slow from its torrid rate.
• Transatlantic shipping rates rise on gasoline cargoes; arbitrage still closed. 
• Season of mists but little mellow fruitfulness for OPEC, following gloomy IMF outlook. 
• CIF Northwest European jet cargo premiums hit lowest levels since Dec 2010. 

Bloomberg

• Oil Drops to Four-Week Low on Fed Outlook.
• Commodities Erase This Year’s Gains.
• Germany’s Drive for Green Energy Subdues 2013 Power Prices: Energy Markets.
• China’s State Council Approves Resource Tax Changes for Oil, Natural Gas.

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