Two Markets in the Cross Hairs

This week the energy market and the S & P are in focus. Taking the energy market first we saw a technical breakout on the September futures on July 5th, with a close of $103.05 per barrel. This came after a long sideways movement going back to Feb 14th when the close came in at $99.13 per barrel. Given a rather sluggish economy you are wondering what caused this spike. To begin with we must recognize that the oil market is at best mysterious. We have production, exports and imports going on simultaneously in every major country from North America, to Europe and Asia. For this reason it is difficult to pinpoint a single factor that triggered the rise.

We do know this. The storage hub for US crude oil is Cushing Oklahoma. Cushing is a city of oil storage tanks. Oil traders follow the storage changes at Cushing. High inventories mean that we have plenty of oil to draw from. When in inventories are low traders will bid up the price. Over the past month storage at Cushing has been averaging 61.9 million barrels.
So we have plenty of oil in storage.

What else is going on? With a sluggish US economy, oil imports have dropped while oil production is rising in the US due in part to the shale oil boom. Where did all this oil go? The oil went to the highest bidder and that bidder was at export. To give you a sense of what is happening US crude petroleum oil exports were 600,000 barrels per day in 1984. In 2009 they shot up to 3,200,000 barrels per day and are still rising. This year the US will export more oil than ever before. If you are wondering where all of our Alaskan oil is going, guess. It is being exported to South Korea, Japan, China, and Taiwan. Alaska now supplies only 8% of US oil.

Oil like any other commodity will chase the highest bidder. Look for oil and gas prices to keep moving higher.

Moving now the S & P, we have a similar situation. The S & P September futures peaked on May 22nd at 1,680.25. On Friday of this week they made a new high at 1,690.50. The new high was only 10 points above the previous high. That is nothing to write home about but it bears watching. Meanwhile US Federal Reserve Chairman, Ben Bernanke, assured Congress that he will monitor the economy to determine whether or not to continue the present stimulus of $85 billion per month in purchases of government bonds and mortgage backed securities. This provided a cushion for prices to move higher. August is often a sluggish month for stocks so we can see some choppy trade in the weeks ahead. Brokers and traders head to the Hamptons on Long Island for their summer vacations. There is an old adage, “Leave in May and come back in November.” So far this is holding true to form. If you do place trades do your homework and always use stop-loss orders.

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