We are continuing to see forced liquidation of over leveraged hedge funds. Need proof? Just look at the afternoon tape on Monday. The Dow dropped -400 points in the last hour of trading after rebounding to +200 in early afternoon. Once the funds finished opening the mail and tallied the day's redemption requests the selling came hard once again. This last hour panic selling is a clear indication of forced liquidation not traders just taking profits or closing out long positions.
Crude prices rallied back to more than $64 when the Asian markets opened on Tuesday and posted gains from bargain hunters. The Nikkei rallied +6.4% at the open and helped push many of the other indexes higher. I doubt anything happened to global oil demand between 2:30 NY time on Monday and midnight to push oil prices back over $64. Don't believe the reporters trying to explain the mundane market moves by making up a reason for every decline or rebound. Sometimes it is just the market and not some change in global outlook or OPEC production.
OPEC's ability to restrict oil production may be slipping away. The oil rich Middle East has been immune to the global financial crisis until yesterday. Oil rich Kuwait's central bank announced they would guarantee bank deposits and put together a bailout of one of the country's largest banks. The explosive petroleum-fueled growth in the Gulf appears to be falling on hard times. With hundreds of skyscrapers under construction in the Gulf region it appears they have run out of tenants. Property investors are not finding buyers for their newly constructed units. If you cut off the supply of oil dollars those five-star properties suddenly look very expensive.
On this side of the pond Hugo Chavez is in trouble. Falling oil prices has crippled the dictator's grip on Venezuela. Chavez is rumored to be about to announce a cutback in social programs, domestic handouts and foreign aid to other countries. The first spending cut will likely be the $2 billion in arms from Russia followed by oil subsidies foe Cuba and other Caribbean nations. Chavez gives away nearly 50% of Venezuelan production to insure continued support for his paper tiger government in Latin America. Some of that production goes to subsidize gasoline at 14-cents per gallon for Venezuelan consumers. The last time he tried to raise rates there were riots all over Venezuela. His oil production is bleeding freebies and in the end it may cause a change in leadership in Venezuela.
In the U.S. gasoline prices have fallen so fast that several refiners are shutting down production rather than continue to feed the gasoline glut. Gasoline has been reported as cheap as $2.09 per gallon in Texas but I paid $2.69 in Colorado today. The rapid decline in gasoline prices is outstripping the current drop in oil prices. Refiners are in trouble again. They could not make a profit at $147 oil because the cost of oil was higher than what they could get for the refined products. Today the price of gasoline has fallen so sharply that it is hard for refiners to make a profit at $62 a barrel. Refiners need a steady price on oil so normal market forces can establish a reasonable crack spread. The volatility in the oil market is causing the spread to narrow and capacity to go offline.