Get in on Commodity Bull Market 2.0

10/07/2011 9:00 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Signs are emerging that a potential bottom could be forming not just in the oil market, but in other commodities as well, effectively clearing the way for a renewed commodity bull market.

Did you miss the last commodity bull market? Well, you’re in luck because it’s back! Back by popular demand, the commodity bulls are coming back out of hiding.

Recession fears? What recession? As ADP jobs data and big draws in oil supply seem to suggest, that talk of a recession may have been greatly exaggerated. OK, well maybe not greatly exaggerated, but exaggerated nonetheless.

We saw a dramatic key reversal bottom on oil that was egged on by some very surprising drops in supply. The Energy Information Agency (EIA) helped inspire a market that was already feeling better about the US economy and increasing hopes that Europe would do what it needed to do to increase liquidity to their Greek-burdened banking system.

Oh sure, the drawdowns the EIA reported had a lot to do with a big drop in imports of over a million barrels a day, drops in the Gulf coast, and seasonal factors, but if you look beyond that, there are signs that oil demand is back on the upswing.

  • The EIA reported US commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.7 million barrels from the previous week. At 336.3 million barrels, US crude oil inventories are in the upper limit of the average range for this time of year
  • Total motor gasoline inventories decreased by 1.1 million barrels last week and are above the upper limit of the average range
  • Finished gasoline inventories increased, while blending components inventories decreased last week
  • Distillate fuel inventories decreased by 0.7 million barrels last week and are in the upper limit of the average range for this time of year
  • Propane/propylene inventories increased by 1.2 million barrels last week and are below the lower limit of the average range
  • Total commercial petroleum inventories decreased by 4.6 million barrels last week. Total products supplied over the last four-week period have averaged just under 19.0 million barrels per day, down by 1.3% compared to the similar period last year
  • Over the last four weeks, motor gasoline product supplied has averaged 8.9 million barrels per day, down by 1.7% from the same period last year.
  • Distillate fuel product supplied has averaged about 3.9 million barrels per day over the last four weeks, up by 2.0% from the same period last year.
  • Jet fuel product supplied is 2.9% lower over the last four weeks compared to the same four-week period last year

While demand still lags year-ago levels, the numbers are suggesting a bit of a demand surge. Perhaps the big break in the prices at the pump is helping, as is the fact that the US manufacturing sector and auto sales are rebounding.

More and more, it is feeling like a bottom; a bottom not only in oil, but across the entire commodity spectrum.

Copper rebounded from deep in bear market territory and gold seemed to rebound sharply from its test just below the $1600-per-once area.

Cattle and hogs are surging, inspired by tight supply and very strong Chinese demand.

Now, if the market felt more confident about the Eurozone, we could see a big rebound, and the man that has caused more major one-day commodity market moves—none other than European Central Bank (ECB) president Jean Claude Trichet—spoke yesterday.

Jean Claude, the commodity markets are going to miss you and are prepared for a big move in your final press conference as ECB president!

Mr. Trichet in past press conferences has caused large “limit-up” and “limit-down” moves in oil, and my bet is that he will feed the new baby bull market. (So would that make it a calf market?)

See related: Limit-up and Limit-Down Trading

The Eurozone decision to raise rates in recent months shows that the ECB has a narrow view on how inflation might be created and has ignored the fact that their inflation-fighting policies as far as commodities have gone have had the opposite effect.

The ECB was not expected to do anything with rates, though some feel that the ECB should lower rates or perhaps announce some form of quantitative easing to stimulate what seems to be a faltering EU economy.

Can Jean Claude restore the confidence in the EU that has been missing due to the lack of decisive action on the EU banks? Every commodity bull is waiting to find out.

By Phil Flynn of PFGBest.com

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