Wednesday, March 26, 2014

Guess who lets their banks fail?

By Phil Flynn

Banks on the Run!

The oil market is locked in a battle between bullish and bearish forces keeping prices in check and the bulls and bears at bay. A big build in crude supply as reported by the American Petroleum Institute is being offset by the oil spill in the Houston Shipping Channel.  Economic growth in China is also taking center stage and reports of a run on some local banks is raising concerns that China’s move to allow some business’s to fail could undermine confidence in a system that thrived on moral hazard.

The Financial Times reported that, “Hundreds of depositors have raced to pull their cash from a small rural bank in eastern China, forcing local officials to take emergency measures to calm the panic after the bank run began to spread. Coming weeks after the first true default in the Chinese bond market, the run on Jiangsu Sheyang Rural Commercial Bank is the latest sign of growing stresses in the country’s financial system.”

Those worries come after a week where soft Chinese manufacturing data led to the assumption that China would move swiftly to juice the economy or fail to meet their growth target of 7.5%. Growing unease with China’s banking situation could further hurt growth and in turn slow Chinese energy demand.

On the bullish side there are still geo-political risks but that could, over time, turn out to be bearish. Talks of more sanctions on Russia and the possibility that they could slow growth in Europe would also lower demand expectations. It seems the bearish fundamentals outweigh the bullish but with a weak dollar and seasonal factors the market is having a hard time breaking. With the EU threatening more some QE type of moves that may give the dollar a boost and add to the bearishness.

Yet it is hard to be too bearish at this time of year. With refineries in maintenance and drawing down inventories of gas it always seems to be a time when upside risks abound. The API delivered a whopper build 6.28 million barrel crude build. Yet that will change as ships in Houston will be backed out for a while. Still low refiner runs may slow the production of summer gas blends. On top of that a BP oil leak from its Whiting Indiana refinery may increase worries about an already tight Midwest gasoline market. Gas inventories fell by 2.84 million barrels which you would expect for this time of year. Refinery runs came in at 86.8%.

Natural gas(NYMEX:NGJ14) is getting a boost on another winter blast and the realization by the market that if prices fall much further we may not be able to get back to full storage. The U.S. House of Representatives is pushing fast tracking LNG exports and that is offering support to the back end of the curve as well. Our Call for $7 gas by 2015 does not look so farfetched now. Does it?

The Wall Street Journal reports that “Cotton prices surged to the highest level in more than two years Tuesday as investors focused on limited supplies of the fiber. Cotton for May delivery on the ICE Futures U.S. exchange rose 3.8% to 94.11¢ a pound, the highest closing price since Feb. 7, 2012. The gains reflect the market’s worries about cotton supplies from the U.S., the world's largest exporter of the fiber. The current crop is the smallest in four years and not enough to meet demand. That has reduced cotton stockpiles to the lowest level in decades, shrinking the cushion of fiber in case severe weather or other catastrophes damages the next crop.

The seriousness of the supply situation was underpinned on Tuesday after the U.S. Department of Agriculture released its final report on the amount of cotton ginned for the 2013 crop. The report showed U.S. production at 12.87 million 480-pound bales, 2.4% below an estimate released earlier this month.

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