Notes From Underground: WHY NOTES FROM UNDERGROUND IS WHERE 2+2=5 IS A BEAUTIFUL THING

Yesterday, it was such an easy game to play but now the IEA had entered and made it so much harder and it looks as though they’re to stay.

The early morning entry of the IEA into the market pricing of oil has given rise to a slew of conspiracy theories. I care not a damn about the theories but want to analyze the impact of the action and the effect upon the markets. Government actions, no matter how ill-advised, are to be understood and analyzed in the real and potential outcome on world markets.

The Obama Administration has been floating the idea of opening the SPR in an attempt to break the back of financial speculation in the energy and food sectors. It appears that the unilateral move by the Obama Administration would not go down well as many in Congress and elsewhere would have attacked it as an electioneering gimmick to drive down gas pump prices and attack the “locusts” on Wall Street. It seems that the move then became to internationalize the decision by using that “august” body the IEA.

In order to get the major participants to go along I am wondering what deals were made and what potential impact it will have on markets as we go forward. One analyst on TV I think had it very correct: Whoever crafted the action waited until the price of oil was already moving lower and when WTI was at the 200-day moving average, released the announcement so as to get the most price action, as so many long-term traders are geared to that 200-day moving average.

The rationale was that the Libyan crisis had removed 140 million barrels of oil from the market so the supply had to be provided by an international consortium of reserves. A grand alliance and a good headline. Interesting, though, that the U.S. contribution was almost exactly what the BUSH ADMINISTRATION released post-Katrina.

I am not making a statement about the Obama Administration, only trying to understand the market impact. The fact is that POLITICIANS OF ALL LABELS will use whatever tools are at their disposal to maintain power.

This type of action of not from the book of Saul Alinsky but from Richard Nixon. It is incumbent upon us as traders to analyze the events and look toward its potential impact:

1. Did Bernanke know ahead of time?

2. Did the French and British, who are struggling in Libya, get any assurances on American aid and efforts in the NATO operation?

3. The Saudis evidently knew because of the early leak and recantation. What is their payoff?

4. If the action is deemed to be directed against the Iranians for their stance in OPEC, what will be the Iranian and Venezuelan response?

5. Impact upon markets: Everything initially broke hard in a classic deflation, risk-off scenario, which is what the authorities hoped to accomplish.

6. Grains and sugar rallied back by their closes as did the EQUITY markets

7. WILL THE IEA’S ACTION BE TRANSITORY AS THE GLOBAL SUPPLY/DEMAND EQUATION FOR COMMODITIES HAS MANIFESTLY SHIFTED?

8. WILL WE FIND THE INFLUENCE OF CHEAP MONEY IN AN UNDERPERFORMING GLOBAL ECONOMY IS THE MOST POWERFUL STIMULANT IN THE GAME?

16 Responses to “Notes From Underground: WHY NOTES FROM UNDERGROUND IS WHERE 2+2=5 IS A BEAUTIFUL THING”

  1. PBL Says:

    Right on point. And I would expect to see a bounce in mkts today initially. The real game begins once that has happened and we see if it’s a dead cat bounce or yesterday was a a one off day. I’m willing to speculate that we are starting a new down for commodities and euro currency. Long live the dollar, ha!

  2. Michael Greenberg Says:

    Oil reserve release was not unilateral. South Korea released 3.46M barrels and Japan reduced mandatory stockpile requirements to 67 days in oil reserves v the normal 70 for 1-month.

  3. jim Says:

    The SPR is as opaque as the gold supposedly held at Fort Knox. Can anyone ever prove that any oil in any amount was actually released from the SPR? What mechanism was utilized to sell the oil? How and who removed the oil? Who purchased the oil and at what price?

  4. yra Says:

    Jim–the mechanism of course is a “swap”—and it will be repaid by moving the oil back via the same pipelines it went out from.Whether or not it actually takes place we will not know and the impact on the markets is all we have to go by.And that will be a fleeting success for it still fails to deal with the real dynamic that is taking place in the world–the supply/demand curve for so many commodities has shifted dramatically.Look at soyabeans,12.99 was at one time the 38 year highs–now it is the new floor

  5. yra Says:

    Michael–I didn’t say it was unilateral–prior to the IEA it would have been a unilateral move but the IEA gave it cover for the Libyan rationale and othrs were willing to join in–but what were the political tradeoffs?

  6. BJS Says:

    The amount released does not seem to equal the amount used worldwide in a day. How can one assume this will have a lasting effect past a few months at best?

  7. Arthur Says:

    In a note to clients, Eurasia Group global oil analyst Greg Priddy called the stockpile release “ ‘stimulus’ by other means.” So, it represents the use of strategic oil reserves as a means of macroeconomic stimulus.”

  8. Jim’s Mailbox | JSMineset Says:

    […] is that POLITICIANS OF ALL LABELS will use whatever tools are at their disposal to maintain power.More…Select LanguageAfrikaansAlbanianArabicArmenianAzerbaijaniBasqueBelarusianBulgarianCatalanChinese […]

  9. yra Says:

    Arthur some have been making that argument–it is an interesting view but will have to think more about it.But any time they try to manipulate the markets they are entering dangerous territory.If Bernanke was in on the deliberations I would argut that he will have tarnished his credentials

  10. rohrintl Says:

    Excellent assessment of the sheer cynicism from a guy who promised to “change the way things work in Washington DC.” Very Nixon-esque indeed, but from the other side of the spectrum: Enviro-Socialist instead of Law&Order Right Winger…

    …yet lends a lot of credence to the old saw about the Far Left and Far Right meeting up at the back side of the curve as Totalitarians. (Who said that?)

  11. yra Says:

    Hannah Arendt and many others

  12. Danny Says:

    Yra and All,

    The SPR oil is bought and sold in a “public auction” meaning that refiners (and maybe some physical oil traders?) will submit bids for the oil. The usual time to delivery is 10-14 days. I am sure that the Gulf Coast refinery’s have quite a competitive advantage (in terms of transport costs) since the SPR is based in LA and TX. I have also come to understand that in the past the SPR has handled sales using a swap like structure, as you described above, but supposedly this time the sales are outright with no official commitment to re-stock the SPR (which in theory should increase the market impact of these sales).

    I don’t pretend to know the answer, but it sure seems to me that we are at, or near, the fork in the road towards entering a new deflationary period with respect to the end of QE2. I suppose it all depends on whether you are in the camp of stocks vs. flows (bernanke and the Fed being self proclaimed in the stocks camp) with respect to the impact of QE stimulus on the economy. IF you find yourself in the flows camp…there is more than ample opportunity for huge downside pressures on commodities…as the dollar will likely strengthen putting tremendous pressures on commodities and this SPR announcement is only adding further pressure on oil/commodities alike.

    God speed.

  13. yra Says:

    Danny–thanks for the informative post.Bernanke and company are most definitely in the stocks camp.There is more to this going forward and the lesson for the FED may be coming with the Maiden Lane 2 disposal a real time lesson in how the market will upset the best designs of economic models.The AIG bid is looking pretty attractive now.

  14. USIKPA Says:

    Wasn’t it like a promise to deal away with the Libian revolution leader in 30 days at most&

  15. Arthur Says:

    Bernanke is more than willing to accept a 2% increase in inflation if it means a 4% drop in the unemployment rate.

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