A friend on an institutional desk writes tonight:

Crude oil got crushed today with the May ’11 WTI contract trading below $109 per barrel as the stock market closed – and this after it traded above $113 for several hours Sunday evening. The IMF came out and slashed its 2011 GDP projections for the U.S. and Japan, citing a lack of job creation in the former and the natural disaster in the latter, and Goldman announced that it had taken off it’s ‘long CCCP’ trade (long copper, cotton, crude oil and platinum). The Libya cease-fire speculation also sparked some downside pressure. These “reasons” for crude’s sharp sell-off seem as good as any other to me. There was unconfirmed chatter about an imminent hike to margin requirements for COMEX-traded gold and silver (the latter reversed -5.1% intraday from highs to lows), and it occurred to me that perhaps we were looking at a commodities liquidation event, but the charts make it clear that the move started in crude.

Despite the damage suffered by the energy stocks today as a result of crude’s tumble (S&P 500, 400 and 600 Energy indexes down -1.9%, -2.4% and -2.3%, respectively), I couldn’t help but notice that the transports and consumer discretionary stocks held up pretty well. I’ve pasted intraday charts of the Dow Jones Transportation Average (left) and the S&P 500 Consumer Discretionary Index (right) below that go back ten days.

Both groups of stocks experienced an “inside day” today, meaning that their intraday lows were higher than yesterday’s lows while their intraday highs were lower than yesterday’s highs (see the green wedges in the charts). I take the reluctance to push these stocks higher as a sign that traders believe the sell off in crude was a transitory event. “Too early to buy ‘em on crude’s weakness – WTI could be up $3 again tomorrow and you don’t want to be left holding the bag.” Or something to that effect. After all, if the Libya cease-fire turns out to be a pile of malarkey, as it appears to be, why wouldn’t today’s sell off be reversed?

Maybe because there’s no one left to buy the stuff. The chart below on the left shows speculator long contracts minus speculator short contracts in WTI crude, and the record net bullishness confirms that the hot money is hugely bullish on crude oil (the CFTC data is current to April 5th). In this context, the reluctance to buy transports and consumer discretionary names makes perfect sense. Why put on a trade that goes against your core view (that oil is going up)?

I actually think that a contrarian approach makes a lot of sense here. Look at the above left chart and ask yourself how many people you know to be bearish on crude oil. I know of very few – actually, I know of one high profile hedge fund manager who claimed to be bearish on crude at a recent dinner, but he’s a stock picker! Now take a look at gasoline deliveries by refiners to U.S. wholesalers in the chart above on the right: demand stinks, probably because the price has gone up so much in recent months and because the average U.S. consumer has well-documented cash flow issues.

There’s more. I have been accumulating against-the-grain articles on China in recent weeks and I invite you to take a gander at the following snippets:

• “A copper shortage forecast for this year may be in doubt because of a buildup of stockpiles in China, Standard Bank Plc said. Shanghai warehouses hold some 600,000 metric tons of refined metal, with another 100,000 tons in southern ports, analyst Leon Westgate in London said in a report e-mailed today. That equates to about 40% of China’s net refined copper demand, he said. Some warehouses are running out of room to store metal, according to the report. (from “Copper Shortage May Be in Doubt in 2011, Standard Bank Says,” by Claudia Carpenter and Agnieszka Troszkiewicz of Bloomberg News on March 28th, 2011)

• “China will soon order a halt of all planned electrolytic aluminum projects because of overcapacity in the industry, the China Securities Journal reported today, citing Su Bo, Vice Minister of Industry and Information Technology. The order was previously scheduled to be issued in March and has been delayed, the newspaper reported, citing an unidentified person. The Ministry of Industry and Information Technology, the National Development and Reform Commission, and six other agencies will issue the order soon, according to the report.” (from “China to Soon Halt Planned Aluminum Projects, Securities Says,” by Bloomberg News on April 10th, 2011)

• “China’s Ministry of Finance is considering a reduction of export rebates for some aluminum and stainless steel products, the China Securities Journal reported today, without citing anyone. Export rebates for some aluminum products may be reduced to 9% from 13%, the newspaper reported. The entire 5% export rebate for stainless steel products may be removed, according to the report.” (from “China May Reduce Export Rebates for Some Metals, Securities Says,” by Bloomberg News on April 11th, 2011)

Calling an end to the Chinese capex boom is not something to be done whimsically, but it does appear as though they’re ratcheting back a bit, doesn’t it? (As I write, I see this headline scroll down my Bloomberg screen: *CHINA ECONOMIC GROWTH SLOWDOWN IS `MAJOR RISK,’ NOMURA SAYS…for what it’s worth.) Only marginal demand moves prices, which means that China only has to reduce the rate at which its consumption of raw materials is growing for there to be a downside impact on price.

To be sure, the unrest and violence in MENA is an issue that has not gone away, but all of a sudden I’m wondering if traders’ focus may shift away from supply at some point and toward demand. If so, there’s a teed up trade that can be expressed either long or short – depending on whether you’re bullish or bearish on the market as a whole. Bulls might take a look at the transports (IYT is the ETF) or the consumer discretionary stocks (XLY), while bears might focus on energy (XLE etc.).

Category: Commodities, Energy, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “Crude oil got crushed today”

  1. macrotrader603 says:

    So to clarify, WTI moved from 85 t0 112 in less than 60 days, a 30+% move, and it gave back 3% today…that is the definition of getting crushed?

    I think anyone who has been short crude or silver the last 60 days is the true definition of getting crushed.

  2. Guillermo says:

    @macrotrader: Crushed here. I am long June/ Sept PUT spreads in XLE. And long gold vs silver (today helped, but not enough)

    The sell-off in silver today was marvelous, one only needs to look at the price/volume action in SLV and the little spikes in the B/A of May/June COMEX MINY silver spreads to see that. a whole lot of rushing for the exits at technical points. In my opinion, silver could still have another oomph in it, but today’s action made enough hands shake that when the next sell-off comes, it will come with more force. However, I will say that, if gold finally starts rallying and catches up to the last month of silver action, I would expect a lot more support buying instead of panic selling in the next dip.

    FWIW I agree with the demand destruction story (hence my PUT spreads). The GDP growth downward revisions on estimates are not news. I believe Calculated Risk started talking about this over 2 weeks ago and McBride is no Rosenberg. I think commodities are due for a breather and maybe a violent sell-off, but it will be temporary. I’m short now, but would be hugely long (except PMs) if we saw a good sell-off (15-20%+). I’m particularly fond of soybeans and rice right now. Don’t know enough about wheat, but definitely do not like corn. I also like dollars via DX right now. I don’t really mess with too many other things.

  3. macrotrader603 says:

    @Guillermo…good post.

    A trader’s view depends on the system they trade. A mid to long term trend follower will see markets differently than a swing trader, day trader, etc. I trade a longer term trend following system, and the primary uptrend is still up on silver, but at some point all trends do end.

    I have no idea when the silver trend will end, but my system will tell me when to exit and go short. I don’t look at fundamentals at all, so I can’t speak intelligently there.

    I am long corn on the recent breakout, and most commodities, but short cocoa, nat gas, and sugar.

  4. wunsacon says:

    What are the chances the Obama administration is releasing crude from the SPR not publicly — which would show weakness/concern — but quietly, to knock the price down? “See? It’s just volatile. No moonshot here.”

  5. wunsacon says:

    Then again, I give BR’s friends’ explanations slightly better odds…

  6. Maybe because there’s no one left to buy the stuff.

    ‘ceptin’ my gas station

    FWIW I’m still at max possible cash in my gold positions but I’m only a few points above my first buy back position. We are also near opex so that needs to be taken into consideration

  7. he should have gone w/ “Crude oil got cracked today” , no?

    similarly, http://finviz.com/futures_charts.ashx?t=ZS ‘beans, down ~2.85%, were ‘Crushed’ ..

    :)