Fed cuts increasing demand and lowering the dollar support crude prices

Oil futures jump back above $90 a barrel

by John Wilen

Oil futures jumped back above $90 a barrel Friday, adding to the previous session’s sharp gains on a view that the recession worries that pulled prices lower in recent weeks may have been overblown.

So markets are now linking rising oil prices to a stronger economy? This is a change in rhetoric from the previous talk that high oil prices were slowing demand, to the current talk that high demand is driving up oil prices.

This would signal to the Fed that markets are saying the economy is now strong enough to cause further inflation.

Energy investors were heartened by recent moves by the Federal Reserve and Congress to shore up the economy, which could prevent oil demand from slowing as much as many had feared.

The Fed doesn’t want this to happen – markets seeing their moves as supportive of higher inflation.

“This week’s emergency interest rate cut by the Fed and the economic stimulus plan proffered by Congress appear to have, for now, stemmed fears of a looming recession in the U.S.,” said Addison Armstrong, director of exchange traded markets at TFS Energy Futures LLC, of Stamford, Conn., in a research note.

Word that Chinese oil demand grew by 6.4 percent in December, the highest rate in months, contributed to oil’s advance.

Concerns that demand from the booming Chinese and Indian economies is outstripping global oil supplies helped push oil to records above $100 earlier this month.

Rising oil prices are also signaling that India and China continue to grow quickly enough to drive up prices.

Light, sweet crude for March delivery rose $1.30 to settle at $90.71 on the New York Mercantile Exchange after rising as high as $91.38. Oil futures last closed above $90 last Friday.

While investors believe the government’s $150 billion stimulus plan and the Fed’s rate cuts will stave off a serious economic slowdown, rate cuts also tend to weaken the dollar, giving investors another reason to buy oil futures. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.

And the Fed’s cuts have weakened the dollar and also contributed to the higher oil prices.

In other words, the article is stating that the rate cuts caused both strong demand and a weak dollar, both driving up inflation.

The financial media is beginning to look past recession fears and to inflation.

Look for article about how the Fed is falling behind the inflation curve.

“When (investors in foreign) countries go to buy oil, they’re buying it on sale,” said James Cordier, president of Liberty Trading Corp., in Tampa, Fla.

Many analysts believe the weakening dollar helped draw speculative investors into oil markets this fall and winter, driving oil prices
above the $100 mark.

Other energy futures also rose Friday. February heating oil futures jumped 4.28 cents to settle at $2.5191 a gallon on the Nymex while February gasoline futures added 3.54 cents to settle at $2.3182 a gallon. Heating oil and gasoline prices were supported by news that Valero Energy Corp.’s 255,000 barrel a day refinery in Aruba was shut down due to a fire.

February natural gas futures rose 18.1 cents to settle at $7.983 per 1,000 cubic feet.

In London, March Brent crude rose $1.83 to settle at $90.90 a barrel Friday on the ICE Futures exchange.


♥

Re: UN Warns of Biofuels’ Environmental Risk

(an email)

THANKS, DAVID, COMMENTS BELOW IN CAPS

>    Subject: UN Warns of Biofuels’ Environmental Risk
>
>
>   By MICHAEL CASEY
>   AP Environmental Writer
>   BANGKOK, Thailand
>
>   The world’s rush to embrace biofuels is causing a spike in the price of corn
>   and other crops

THE REASON THE PRICE IS GOING UP IS THAT HUNGRY PEOPLE ARE COMPETING
FOR WHAT’S LEFT TO EAT AFTER THE ACREAGE GOES TO FUEL PRODUCTION

and could worsen water shortages and force poor communities off
>   their land, a U.N. official said Wednesday.

FORCING PEOPLE OFF THE LAND IS SECONDARY TO FOOD AND WATER SHORTAGES?

>   Foremost among the concerns is increased competition for agricultural land,
>   which Suzuki warned has already caused a rise in corn prices in the United
>   States and Mexico and could lead to food shortages in developing countries.
>
>   She also said China and India could face worsening water shortages because
>   biofuels require large amounts of water, while forests in Indonesia and
>   Malaysia could face threats from the expansion of palm oil plantations.

also:

The New York Times
Governments in Europe and elsewhere have begun rolling back generous,
across-the-board subsidies for biofuels, acknowledging that the
environmental benefits of these fuels have often been overstated.

SEEMS THAT THE POTENTIAL TO STARVE TENS OF MILLIONS OF PEOPLE TO DEATH
TAKES SECOND PLACE TO ENVIRONMENTAL CONCERNS.

UNTIL THAT HAPPENS, GOVTS WILL PROBABLY CONTINUE THE CURRENT LEVEL OF
SUPPORT AND KEEP FOOD PRICES LINKED TO FUEL,

THIS IS PROBLEMATIC FOR THE FED AS CPI WILL KEEP RISING WITH GASOLINE
PRICES, WHICH WILL DRAG FOOD ALONG WITH IT. AND BOTH OF THESE FEED
INTO THE COST SIDE AND PUSH UP CORE MEASURES AS WELL.


♥

Caterpillar report – what export economies look like

Caterpillar Sees ‘Definite Threat’ of US Recession

(CNBC)Caterpillar’s fourth-quarter earnings rose more than 10 percent, helped by strong sales to mining, energy and construction customers outside the United States, but the company warned it sees a recession as a “definite threat” to the U.S. economy.

The Peoria, Ill. company, which is often seen as an economic indicator, said it has been seeing “anemic growth” in the U.S. economy.

Total GDP is domestic demand plus export demand. They are seeing weak growth in domestic demand and strong export demand. And that’s exactly what has been keeping US GDP relatively high and more than making up for the lost output in the housing sector. So far.

“Over time, weakness in the economy has spread from housing to nonresidential construction and more recently to employment and manufacturing,” Caterpillar said in a press release announcing its results. “A recession is defined as a broad downturn in the economy, a development that seems to be taking place.”

However, Caterpillar predicted that fast-growing sales overseas would permit it to meet its 2008 sales and earnings forecasts even if a recession does materialize.

Exactly the same point.

The company continues to expect earnings per share will rise between 5 percent and 15 percent from its 2007 profit of $5.37 a share, while revenue will grow between 5 percent and 10 percent from $45 billion.

Caterpillar predicted 2008 would be another tough year for the U.S. residential housing market — a key customer for its earth-moving machines — and predicted “recessionary conditions to persist” in other key markets.

It said it expected housing starts to decline to 1.1 million units, down from 1.35 million in 2007, and said new problems would roil the property market, including “a high level of mortgage resets, an increase in home repossessions and the likelihood of a significant decrease in home prices.”

They must be watching CNBC.

Overall, Caterpillar is expecting North America to be its weakest growth region this year, but sales should be flat to slightly higher than a year ago.

Flat to slightly higher domestic demand with rising exports isn’t what a recession looks like.


♥

2008-01-25 Balance of Risks Update

Mainstream economics would put it this way:

  • Inflation risk to long term growth vs short term growth risks

So on the inflation side:

  • CPI year over year up to 4.1%
  • Core CPI 2.4% year over year, 2.9% month over month (2.5% high end of Fed’s comfort zone)
  • Headline PCE deflator 3.6% year over year, core PCE 2.2% (1.9% upper band of their target forecast)
  • PPI up 6.3% year over year, core up 2.0% year over year
  • Crude back to $91 after a brief hiatus (‘high eighties’- relax, only attempt at a pun)
  • CRB testing new highs
  • Grains near the highs
  • Import prices up 10.9% year over year, ex petro up 2.9%, reversing years of pre 2003 declines
  • Export prices up 6.0% year over year
  • Prices paid/received remain on the rise in the various surveys
  • $US index reasonably flat, but other currencies experience domestic inflation
  • Not that anyone cares, but gold is at $913
  • 5 year, 5 years forward implied CPI at 2.51%, vs 2.43% at December 18 meeting

And on the growth side:

  • Housing reports remain weak through the winter months – permits still falling
  • November construction spending up 0.1%
  • Mortgage applications moving higher, 4 week moving average down 2.7% year over year, up 8.5% from November 2006 lows
  • November income and spending (1.1%) came out strong, Oct revised up (0.2% to 0.4%), after December 18 meeting
  • November durable goods on the weak side; December out on Tuesday
  • ADP up 40,000, payrolls up 18,000, unemployment up to 5% from 4.7%
  • Initial claims since meeting: 357K, 334K, 322K, 302K, 301K. Possible seasonal issues but no obvious weakness
  • Continuing claims since meeting: 2,754,000; 2,688,000; 2,747,000; 2,672,000. Still a bit higher than before, but not moving up.. yet
  • November trade gap out to 63.1 billion. December numbers released February 14
  • Fiscal balance: Receipts up 5.7%, spending up 8.8% (with labor day distortion) fiscal year over year
  • December vehicle sales 16.3 million, flat since August
  • December retail sales down 0.4%, core up 0.1% month over month, year over year up 3.2%, core up 3.0%
  • December industrial production flat, up 1.5% year over year
  • GDP and ADP at the meeting, payroll forecast up 65,000 on Friday
  • Fed cut 0.75% coincident with the Soc Gen liquidation related equity weakness
  • February Fed Funds futures now at 3.09%, not fully discounting a 50 cut. Got all the way to 3.15 before stocks sold off.

Market functioning:

  • LIBOR vs Fed Funds under control, 3 month LIBOR down 160 bp since December 18 meeting, TAF functioning well
  • Mortgage spreads still historically wide, but trading, and absolute yields also down since Dec 18 meeting
  • Mtg refi’s way up

Fiscal package is on its way!