Market Talk

Now, at very nearly $107/barrel, you might think crude oil prices are pricing in all manner of supply shocks and disruptions. There seems to be a very large “fear premium” being baked in there, right? Well, not exactly. Our colleague Sarah Kent writes the following:

1314 GMT [Dow Jones] The risk of gas supply disruptions spreading from Libya into other countries in the Middle East and North Africa has not yet been priced into the market, even though as much as 3% of global gas supply is at risk, says Goldman Sachs in a research note. Potential disruptions on this scale would have a significant price impact, according to the bank. “Even if Algeria were the only [other country] to halt gas supplies…we believe that global gas markets could face a negative supply shock,” it adds.

I’m not trying to send you over the edge here, just trying to make the point simply that gas prices are going to keep rising. Would you be surprised at all if there were another disruption somewhere? But the markets would be?

Addendum: Eagle-eyed Ron Paul 2012 points out that in this particular snippet, Goldman was talking about natural gas, and I was talking about gasoline, and he’s right. My mistake. However, I do believe that if the Jasmine Revolution spreads in a material, even violent way to another oil producing nation, Algeria, or say Saudi Arabia, that you will naturally see another spike in crude oil.

Also, while I’m writing this we’ve got Fox Business on in the newsroom, and they’ve got some reporters out at gas stations interviewing people. With prices above $3.50, this is also going to become a big media story, which is only going to reinforce the anxiety people are already feeling at the pump.

Another place where additional supply disruptions apparently aren’t being priced in is in equities. DJIA up 54 here in the early going, as the market is just completely ignoring any and all news related to oil prices and the Middle East.

There are still people out there saying we can “handle” high oil prices. They’re probably the same people who were saying it in the summer of 2008.

This just in: gas costs $3.50 a gallon. If it doesn’t where you live, just wait. It soon will.

The AAA’s daily fuel gauge shows the national average for regular is $3.50. I believe it was $3.47 on Friday. There’s nothing magical about the $3.50 level, except for its psychological effects.

The big problem is that with $3.50 here, the $4 level comes within hailing distance, and it was when gas prices hit $4 in the summer of 2008 that the feta really hit the fan.

Listen, the real fear here isn’t an end-of-the-world kind of thing. Whatever happens in the Middle East, at some point the world will return to something approaching normal, like it always does (which is not exactly the same as normal; when you think about it, we live in a pretty dysfunctional world.) The real fear, for us here in the U.S. at least, Europe, too, for that matter, is that the uprising drives oil prices high enough to derail the recovery.

Crude prices are up more than $2 this morning, pushing Nymex crude futures to near $107/barrel. Brent, the European benchmark that is more directly affected by the events in Libya, is pushing $118/barrel (and lots of people note that a big chunk of U.S. gas prices, being imported, are more sensitive to Brent prices than Nymex.) Given that it takes a few weeks for crude prices to filter through to y0ur local service station, you can expect that prices will keep rising.

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Bottom line on the February jobs report: better, but nothing to spark a celebration. In fact, the report was insubstantial enough to be quickly overwhelmed by sharp gains in crude oil.

Of course, the jobs report did offer enough to get some economists excited, which isn’t too hard considering how long they’ve been gazing at a bleak picture.

February’s job gains “represent the first cog in the labor market gear that will drive the economy into a self-sustaining expansion this year,” economists at PNC say. From where we sit here at MT, it’s very premature to talk “self-sustaining expansion” while the Fed still has the liquidity pedal pinned to the floor, so PNC’s getting a little bit giddy. Firm says “solid gain of 192,000 net jobs reflects strength across most employment categories,” except, of course, government  employment, which ditched 30,000 state and local jobs.

PNC does note wages were “unspectacular” though, “gaining just 1 cent, and not keeping up with the inflationary push from energy and food.” Flat workweek and limp increase in earnings were key points of weakness most economists noted.

Bernard Baumohl, chief global economist at Economic Outlook Group, was much less impressed than the gents at PNC. Digging into the numbers shows companies “in a holding pattern when it comes to hiring. Nothing more, nothing less,” he said. Continue reading…

Bernanke and company’s continued insistence this week that the Fed’s uber-accommodative policy hasn’t played a role in driving up commodity prices continues to grate, and undermine the central banker’s credibility.

We’ve highlighted the extensive (and comprehensive) list of commodities with rising prices in ISM’s manufacturing survey, with few commodities reported as being in short supply. And no commodities — zilch — falling in price.

Well, no surprise, ISM’s February non-manufacturing survey out today shows essentially the same thing. Count 41 separate items listed as commodities up in price, while only three — cotton, cotton products and electrical components — are considered in short supply. Two commodities were down in price –  computer supplies and janitorial services.

Perhaps there are some nuances to supply and demand, and their effect on commodity prices that Dr. Bernanke has uncovered to explain all this. I’m certainly not an expert, but I can read a chart, and just about every commodity I look at began rising right after the Fed chairman’s Jackson Hole QE2 warm-up speech in late August.

To illustrate this even better, let’s go back to ISM’s reports, pre-Jackson Hole. Take a glance at the August manufacturing survey. Just three — three commodities – up in price (caustic soda, copper and corrugated containers); three down in price (polyethylene, polypropylene and steel) and only one — capacitors — listed in short supply. Continue reading…

“Only don’t tell me you’re innocent. Because it insults my intelligence — and makes me very angry…”
-Michael Corleone, The Godfather

Listening to Ben Bernanke repeatedly deny that the Fed’s QE2 program has played any role in jamming up commodities prices stirs the same emotions Michael felt when his brother-in-law Carlo denied fingering Sonny for Barzini’s people.

Bernanke continues to insist that rising commodity prices are due to supply and demand dynamics, and denies any culpability of the Fed’s easy money monetary policy. Senators at today’s testimony on the Hill let that assertion go unchallenged. Would’ve been nice if someone asked Bernanke to reconcile ISM’s February manufacturing survey today, listing roughly 30 commodities up in price, none down, but only three commodities — capacitors, cocoa powder and electric components — in short supply.

It’s a simple enough question: Dr. Bernanke, there’s a laundry list of commodities up in price, and many of their run-ups began in late August, coincident with early mentions of potential QE2. Less than a handful of commodities were reported by manufacturers as being in short supply. So how can supply and demand dynamics alone explain the sharp run-up in commodities during the past six months, when there appear to be few, if any, supply constraints?

For an organization like the Fed where credibility is crucial, it’s amazing that its officials continue to stand by such a flimsy rationale for high commodity prices. Continue reading…

There’s been an awful lot of news escaping the North Africa and the Middle East today, and it’s all pushing crude prices higher. There have been a raft of rumor, vehemently denied, that Saudi tanks were moving into Bahrain. That tanked Saudi stocks.

Libya remains in a state of civil war, there are reports that Iranian police fired teargas on protesters, Oman is deploying troops amid its strife and Yemen’s separatists are already looking at a future past the monarchy. Clearly, this is driving up oil prices. Lately, the Nymex benchmark is up 1.6% at $98.49, and the Brent benchmark is up 1.7% at $113.66.

As we wrote yesterday, keep your eye on the $103-$104/barrel level of Nymex crude – a move over that could have serious repercussions – and remember that the revolt spreading across the Africa and Arabia isn’t going to be tied up in a neat little bow like some half-hour sitcom at the top of the hour, and it’s likely to go off in directions that absolutely nobody is expecting.

Nobody is seriously talking about $4 gas, or $5 gas, but it is a real possibility. Which means that if it comes, nobody will be ready for it. GM’s chairman this morning said the industry isn’t ready for $5 gas. The national average for regular unleaded is $3.37, according to AAA. We know the spike from last week will be working its way to the pump over the next couple weeks, so expect prices will keep rising. If the popular revolt keep spreading, if crude prices climb over that $103 range, and the oil market – about as festering a pit of hot money and speculation as there is – drives it ever higher, you will see $4 gas here in the States.

“I don’t think the industry learned a lot of lessons from 2008—they will this time around,” Daniel Akerson said at the Geneva motor show. “It would not be a good thing to see $5-a-gallon gas right now.”

You know what? It wasn’t just the auto industry that didn’t learn the lessons of 2008. But they may yet get the chance to take a make-up test.

I found this very interesting. If you’re looking for trigger numbers within the crude-oil market, the number to watch for isn’t necessarily $120/barrel (for Nymex crude, at least.) That’s the number most people are pointing to as a tipping point for the economy. But the number, well numbers I guess, you want to keep your eye on is $103-$104. That level is a technical trigger for a spike up to the $140 range than torpedoed the economy back in 2008.

Here’s a break-down from BofA/Merrill Lynch’s Mary Ann Bartel, the head of U.S. technical analysis:

The continuation of the secular bull market for commodities is one of our themes for 2011. Within this theme, we remain bullish on crude oil. The pivotal level for crude oil futures is a 61.8% retracement at $103-104. This resistance has capped the rally, but given a positive trend for oil, our view remains that a break above $103-104 and continued turmoil in the Middle East points to a test of $140-150. On pullbacks, the prior breakout point provides support at $93-92, with stronger support at $87-84. Initial resistance beyond $103-104 is $118-120.

We saw crude oil rise right up to that level last week, and then stop. Mind you, nothing has really changed fundamentally on the ground, and the Jasmine Revolution is still threatening to spread, but the markets just…stopped. When that happened in the crude market, you saw the same halt ripple through all the other markets – stocks especially. It may just be a lull.

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Stocks see selling with some conviction (NYSE listed volume more than 5.7 billion shares)  for the second day in a row, spurred on by fear that soaring oil prices will derail the fragile economic recovery.

Nymex crude briefly hit $100/barrel for first time in more than two years, sending shivers through industrial stocks, and stocks of companies most sensitive to discretionary consumer spending, like Tiffany and Coach.

H-P shares tumble almost 10% after disappointing earnings and outlook, and drop accounts for roughly 35 points of Dow Industrials’ decline.

First back-to-back triple-digit drop for DJIA since early June, average falls 107.01 to 12105.78, and Nasdaq Comp slides 33.43 to 2722.99. S&P 500 ends 8.04 lower at 1307.40.

No real sign that the source of the market’s current angst — unrest in North Africa and Middle East — is about to abate, so oil prices (instead of the Fed) may be calling the shots here for a bit.

Weekly jobless claims, January durable goods orders and new home sales will be tomorrow’s economic reports of interest. On the earnings calendar, GM, Target, Sears and Kohl’s all report before the open; AIG reports after the close.

Watching crude oil futures climb above $100/barrel this afternoon got us talking in the newsroom about what happened to the economy the last time oil bubbled up to these levels in 2008.

That led us to look at the BLS releases on monthly nonfarm payrolls, and then at the eventual revisions to each individual month in ’08 and early ’09. While everyone knows the job losses in aggregate were revised much higher, it’s pretty striking to look back and see the wide margin of difference between the original numbers and the revisions.

For example, the BLS release for July ’08 payrolls (when crude oil peaked above $145/barrel) mentioned ever-so-casually that “nonfarm payroll employment continued to trend down in July,” originally reporting 51,000 jobs lost.

The revised decline? Down 231,000.

In reporting the August numbers, BLS stuck with the “trend down” phrasing as the economy was thought to have lost 84,000 jobs. The real drop was revised to 267,000. September’s decline was originally pegged at 159,000, but really fell 434,000. Ouch.

So, in 2008′s third-quarter, the US economy shed 932,000 jobs, when it was thought at the time we’d “only” lost less than one-third of that amount.

We aren’t the first to make this point, but these examples make it pretty clear that all the anticipation and hyperventilation over the fresh monthly data is a waste. The numbers will be revised, and revised again, and there’s a good chance the final numbers bear little resemblance to the ones initially reported.

Something to keep in mind a week from Friday, when the February jobs report comes out.

(Photo courtesy of Library of Congress.)

Things are looking chaotic out there. Libya is being torn in half, there’s fighting in the streets in Greece – again. Crude oil prices are spiking, stocks are tanking. The fear underlying all the selling in the market, all the moves into safe havens, is that the crude oil spike eats into a weak global recovery and tips the economy back into recession.

It certainly could happen. There’s a disruption right now to oil flows, given what looks like a civil war in Libya. But the loss of Libyan production can be made up by other nations, primarily Saudi Arabia, which is sitting on the world’s biggest reserves under its sands.

For this moment, the crude-oil spike doesn’t appear to be sufficient to derail the economy. Painful, yes, annoying, without a doubt. But not enough to tank the economy. Much depends upon what happens from here on out, of course. If the revolutionary fervor reaches Saudi Arabia, for instance, and shuts down the oil fields there, well then all bets are off. You’d see a super-spike. So far, that doesn’t appear likely. But again, the Jasmine Revolution is moving with quite a bit of speed.

Capital Economics’ Julian Jessop puts it into some perspective:

The turmoil in the Middle East has prompted a chorus of warnings that the world economy could eventually be dragged back into recession if the price of oil continues to climb relentlessly (well yes it could, obviously). But while we continue to expect global growth to be slower this year than in 2010, and slower still in 2012, we do not expect the oil price to be pivotal.

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