UNDER THE BIG TOP: HOW MUCH LONGER CAN CRUDE LEVITATE?

4, 8 & 12 months ago Crude was where it is right now.  In each of those periods 1) were expectations of future growth in demand for crude up? Yes.  2) Was the Chinese a big inventory buyer foolishly outbidding itself in creating superficial demand? Yes. 3) Was the Carry trade favorable so that Wall St bankers could use Fed funds to buy spot crude, store it in VLCCs then sell the > 1 year forward to lock in huge contango profits? Yes  4) Was money abandoning stock funds & MM funds and pouring into Commodity funds in record amounts to fuel purchases? Yes.  5) Was relentless above expectations inventory rebuilding going to turn into a big draw? Of course.

Flash forward to now.  The answer to each of those 5 points has shifted to NO. No rocket science here about where growth expectations have shifted.  As for Chinese inventory buying, it has slowed to a trickle and accordingly, so have Goldman's front running profits. The contango has flattened considerable but there are still well over 100 VLCCs floating out on the ocean holding Wall St. Crude.  The money pouring into commodities has shifted to a slightly less risky Emerging Market bonds.  And now inventory is building at the fastest rate at a point a draw is typically expected.  Looks like some of those Tankers have reached port.

So why is crude still at $73 and not say $63 or $53 or $43?  We have learned that above all, the norm in a Bernanke market is to expect only delayed reactions to the obvious. In 2007, the market misguidedly made a new high only a month before the recession began instead of the usual 6 months of foresight. It literally didn't see the worst crisis in 80 years coming right around the corner.  In September 2008, the market was down less than 20% despite epic financial failures and a real estate depression.  Such was the faith the Fed would hold the system together.  Then of course, it crashed.  Perhaps the same is lying in wait for crude with supply demand dynamics so far out of whack with only bullish future expectations holding it together.  ~ Eden Rahim