The Energy Report for Thursday, June 30th 2011
Junk Science! Whatever happened to credibility? You know whenever you read a supposed scientific report by an organization with a agenda and comes out and says that the report confirmed what they already knew, you know the report is a worthless piece of junk. The Americans for Financial Reform who say they stand for "accountability, fairness and security" lack the very virtues that they say they stand for. Along with "Political Economy Research Institute"(PIRG)from the University of Massachusetts (with emphasis on political) ,Amherst put out a ridiculous, one sided and misleading report that claims that speculators and "Wall Street" is adding 83 cents a gallon to the cost of gasoline. Celeste Meiffren who is the Illinois PIRG Field Director gushed with enthusiasm that, "This report confirms what many of us already know- that price spikes are not simply a result of supply and demand. Wall Street's gambling caused the financial crisis, and now Wall Street's speculation in the oil markets is increasing gas prices. Our government has the tools to stop Wall Street gambling on oil and they need to act."
Gambling on oil? This comment in and of itself shows Ms. Meiffren total lack of understanding of how and why futures markets work. She is trying to use guilt by association to mislead the reader, tying the financial crisis to oil trading. Does she not understand that speculation did not cause the financial crisis yet assumed the risk for a global economy gone amuck? Does she not understand the transfer of risk that if not assumed by speculation, would have led to a total freezing of the global economy and created a situation much worse than the one we have now? Her charges backed by nothing obviously, shows bias and cast doubts not only on her credibility and the credibility of her organization. Where is your accountability and where is your fairness, Ms. Meiffren?
Now I am not sure of the background Robert Pollin and James Heintz, the authors of this report but I wonder if they take pride in presenting a report where you adjust the data to come out with your preconceived notions. They state i their report, "The average retail price of gasoline at the pump, excluding taxes, in May was $3.96. In January 2009, the average retail price was $1.96 (expressed in May 2011 dollars). In other words, consumers are now paying twice as much to fill their cars as they did 2½ years ago. (Prices went up during a war in the Middle East and the biggest threat to global oil supply in decades! I am shocked!). Even as recently as last October, the average gas price at the pump was $2.93. The average gas price has thus risen by a full dollar—35 percent—in only seven months. What explains this huge run up in gas prices for consumers? To a significant extent this is the result of the economy moving out of a deep recession, into a recovery, which has increased the demand for gasoline. But a major additional factor is the rapid growth in large-scale speculative trading around oil prices through the oil commodities futures market. ( What about war in Libya. The changing of governments in Tunisia and Egypt. The lack of confidence in the dollar and the US budget crisis that has threatened a downgrade of our credit rating and our ability to pay our debt. Or predictions by the International Energy Agency that demand might outstrip supply in the third quarter. You failed to mention any of this.)

Indeed, we estimate that, without the influence of large-scale speculative trading on oil in the commodities futures market, the average price of gasoline at the pump in May would have been $3.13 rather than $3.96. This means that the average U.S. consumer paid a 83-cent-per-gallon premium in May for their gasoline purchases due to the huge rise in the speculative futures market for oil. (To get there you must not account for and leave out the price impact of the war in Libya, the impact of the Arab spring and dismiss the lack of confidence in the dollar and the US budget crisis that has threatened downgrade of our credit rating and our ability to pay our debt thereby making our purchasing power less. Or predictions by the International Energy Agency that demand might outstrip supply in the third quarter. You failed to mention any of this.)
Considering the U.S. economy as a whole, this translates into a speculation premium of over $1 billion for May alone. If the May price were to hold for a year, that would mean that the speculative premium (or risk premium that would exist with or without speculators and no doubt would be higher without, and you must also assume the increased risk from a world with wars and financial bailouts and counties around the globe on the verge of default. A risk premium that exits with or without speculators and a burden that would be carried by the consumers that purport to protect) might be would total $12 billion. For the average U.S. auto owner, the speculative premium amounted to about $41 in May. This means speculative premium for the average two-car family was about $82 in May. That is, each such family spent $82 more in May than necessary for gasoline, and most of this $82 will have made its way into the pockets of large-scale speculators in the oil commodities futures market." (or out of the pockets of speculators. You conveniently leave out that for every dollar made by someone in the futures market someone loses a dollar. For every buyer there is a seller and for every seller there s a buyer. This serious omission shows an utter lack of education and understanding about the markets when you say that only speculators win yet fail to acknowledge the losers are also the speculators. You fail to acknowledge 50% of the marketplace.
Pollin And Heintz try to prove their weak position by pointing to the participation in the market place saying, "For example, the overall level of futures market trading of crude oil contracts on the New York Mercantile Exchange is currently 400 percent greater than it was in 2001 and this is a very weak point as the global oil market has exploded since 2001 from the demand side. Perhaps they have not paid attention to what has been happening in China and the emerging markets. Perhaps they are unaware about the growth of global demand since that time. A larger market demands more participation and reflects the explosive past growth and the projected growth of demand in the near future and 60 percent higher than it was only two years ago. ( which was the start of qunatitaive easing, an act that basically begged money to buy oil. The increased interest in oil by this dramatic amount was induced by the Federal Reserve and their devaluation of the US currency that forced speculators hedgers and sovereign wealth finds to buy oil to protect them from weakening dollar holdings. The Feds begged speculators to buy oil to avoid deflation. Now this is the thanks they get! How would the economy be better off with a deflationary depression?
Now I am sorry if I offended anyone but the truth of the matter is that this type of misinformation is dangerous and could lead to dire consequences for the economy if these half truths lead to damaging legislation that could impede supply and harm average individuals. Besides I gave their report more attention than it deserves. Better to dump on speculators yet one more time than to demand taxes be lowered on the price of a gallon of gas.
Greece is out of the woods for now and the euro has more lives than a cat. The EIA sent oil higher with a big draw in crude that shows that the lack of Libyan crude is taking its toll. The EIA reported that U.S. crude oil imports averaged just under 8.9 million barrels per day last week, down by 271 thousand barrels per day from the previous week. Over the last four weeks crude oil imports have averaged 8.8 million barrels per day, 891 thousand barrels per day below the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 683 thousand barrels per day. Distillate fuel imports averaged 80 thousand barrels per day last week. U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.4 million barrels from the previous week. At 359.5 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories decreased by 1.4 million barrels last week and are in the middle of the average range. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories increased by 0.3 million barrels last week and are in the upper limit of the average range for this time of year.
While the rebound is impressive we still see $85 in our future and if you did not position when I first told you, we may get another great opportunity. Call Phil Flynn at 80-935-6487 or email me at pflynn@pfgbest.com. Make sure you are getting the Power to Prosper by tuning into the Fox Business Network where you can see me every day! Call me at 800-935-6487 or email me at pflynn@pfgbest.com.