Oil Plunges, Commodities Rally Snaps 5/11/2011

On Monday, I wrote that it was not unreasonable to expect commodities to rally given the fall last week.  That is what happened.  On Sunday, James Hamilton wrote that despite increased consumption by emerging countries world oil supply exceeds consumption and in the United States the current oil inventory is significantly above normal.  Hamilton projected a decline in gasoline prices based on each dollar the price of oil moves results in a similar move of 2 and one-half cents per gallon of gasoline.  On Monday, Noahpinion had a good article on how there is no evidence oil futures speculation raises oil prices (as he admits the data is not sufficient and I would add there has not been sufficient study of ETF/ETNs impact and institutional high frequency trading).  Much of the down slide in oil last week resulted from trader's programmed automatic stop-losses kicking in selling and further declines.  James Hamilton today noted that stop-loss trading down slide from last week and noted the havoc which can be wreaked on the market by those who always believe they can buy low and sell high.  The sad fact is that most people over estimate their ability to recognize risk and under estimate their ability to avoid it. Yesterday, the oil analyst, Stephen Schork, commented that the Monday surge in oil prices was justified based on compelling fundamentals in refinery outages, refinery disruption from Mississippi River flooding, difficult seasonal blends transition, and supplies in important markets are tight, despite lower demand.  Olive Capital lost $400 million last week and Astenbeck Capital, run by Andy Hall who is one of the premier oil traders, lost in double digit percentages.  Schork's conclusion was that the rise in oil prices was both justified and a dead-cat bounce with the bull's getting too greedy.

Today, oil dropped 4% bringing trading to a temporary halt when the down limit was triggered and continued a slower fall when trading resumed.  Gasoline futures also plunged.  The weekly oil and gasoline inventory supplies were up more than expected.  As I look at futures now (1:28 P.M. Central Time), all energy, metals, and agricultural futures are down except for cattle.  

U. S. Trade deficit figures today were worse than expected with the deficit up 6% in March on oil imports and a weak dollar, which is expected to drive import costs up, with imports up 4.1% to the highest since August 2008.

So far the dollar is stronger today.  Are we starting to see a new slide in commodities and a stronger dollar, which will lower import costs and commodities?  To what extent does the commodities slide and stronger dollar improve, because we are not going to export ourselves to recovery, recovery chances or will they, after the abrupt end of QE2 combined with falling housing prices, result in deflation? 



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