Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
Syrian Oil Shocks
Surging oil on Syrian fears are raising fears that the global economy could be hurt by this rise in price. Precious metals are soaring but industrial metals are sputtering as the traders fear that the global economy won’t take to well to rising oil prices. Emerging markets are getting a double whammy as falling stock market and currency markets still have the trader seeking safe haven and could go into crisis mode because their energy costs are too expensive.
Oil hit what were the Bulls long term target of $110 a barrel yet a top in this market may not come until the missiles start to fall in Syria. There may be increased trepidation on the buy side but the wall of worry will continue to build. Volatility is rising.
Bloomberg News reported “crude oil call options surged as futures rallied on concern that supplies from the Middle East may be disrupted if the U.S. and its allies attack Syria over its use of chemical weapons against civilians. Implied volatility of October calls protecting against a 10 percent rise in futures prices jumped to 29.39 percent at 2:15 p.m. from 22.73 yesterday as futures gained the most since May 2. Volatility for puts covering a 10 percent drop was little changed, climbing to 25.58 percent from 25.23. “Because of the imminent strike and risk to supply, people are trying to hedge their position, buying options in case of worst case scenario or you’re just adventurous and want to try and capitalize on a big move in the market,” said Phil Flynn, senior market analyst at Price Futures Group in Chicago. “Vol could go up again tomorrow if they are striking on Thursday.”
Implied volatility for at-the-money October options, a key gauge of options value, was 24.44 percent on the New York Mercantile Exchange, up from 21.22 percent yesterday. Volatility for the nearest-month options is at the highest level since May 1. West Texas Intermediate crude for October delivery increased $3.09 to $109.01 a barrel on the Nymex, after touching $109.32.
The most active options in electronic trading today were October $115 calls, which rose 59 cents to 76 cents at 2:25 p.m. on volume of 6,093 contracts. October $100 puts were the second- most active, dropping 24 cents to 22 cents a barrel on volume of 5,280 lots traded. Calls accounted for 59 percent of electronic trading volume. In the previous session, bearish bets made up 62 percent of the 49,647 lots traded. October $96 puts were the most-active options yesterday with 2,508 contracts changing hands as they fell 2 cents to 13 cents a barrel. October $100 puts, the next-most active, declined 1 cent to 46 cents on 2,359 lots. Open interest was highest for December $80 puts, with 40,064 contracts. Next were December $90 puts with 36,184 lots and December $105 calls with 35,347. The exchange distributes real-time data for electronic trading and releases information the next business day on open- outcry volume, where the bulk of options activity occurs.
Gold and silver all of a sudden looks like a safe haven as the rupee gets ripped and the gold haters get a lesson in metals history. Syria is only part of the story as the US may hit the debt ceiling in October and the physical side of the market starts to dry up. Now the reversion back to the bull from bear as speculators get out of what was a record short position below the cost of production is signaling a major potential move. Central banks continue to purchase gold at levels not seen in almost 50 years and for 10 strength quarters in a row. The gold market could surge to a new all-time in coming months as the move reflects eerily the move we made in gold in the 1970’s.
As Reported by KITCO News “The U.S. debt ceiling is likely to garner renewed attention in the coming weeks and could re-emerge as a catalyst supporting gold, if it’s not already, analysts said.” For now, the market is being bolstered by geopolitical tensions in the Middle East while also focused on when the Federal Open Market Committee might start to taper its bond-buying program known as quantitative easing. Gold is sharply higher Tuesday, with analysts reporting safe-haven buying on fears the U.S. could take action against Syria over the latter’s alleged use of chemical weapons. Also, soft sales of new homes and durable-goods orders in the last two business days have traders rethinking how aggressively the FOMC may taper QE, lending some support.
The debt ceiling is also starting to creep back onto the radar of traders. The Obama administration said Monday that the U.S. is on pace to exceed its borrowing authority in mid-October. This means potential for a new flashpoint in the long-running fight between Republicans and Democrats on the size and role of government. Republicans are demanding spending cuts, but President Obama has said he will not negotiate on the debt limit.
“It’s another reason to push people to buy gold,” said Phil Flynn, Senior Market Strategist with Price Futures Group. “Whenever you have uncertainty about the debt of a major economy like the U.S. – that they’re not going to pay their bills due to political grandstanding – it is another reason why people would move to the gold market.”
Such a standoff, along with the European debt crisis, lent some of the support that carried spot gold to its record high of $1,921 late in September 2011. That August, Standard & Poor’s downgraded the credit rating of the federal government from AAA to AA+.
More recently, there were worries about another standoff as 2012 wound down due to the so-called “fiscal cliff” of automatic tax hikes and spending cuts that were to go into effect in early 2013. However, Congress reached compromises that pushed further spending/tax decisions further into the year. Howard Wen, precious-metals analyst with HSBC, said Monday’s news about hitting the debt ceiling in October was not ground-breaking since it was largely expected by markets. “What were more important were the rising geopolitical risks,” he said. “That is the shorter-term driver for gold.” Nevertheless, he also cited the debt ceiling as a potentially supportive influence going forward, after past instances in which investors moved into exchange-traded funds and other gold investments during times of such worries.
“As we approach the debt-ceiling limit in mid-October, and if there is an appearance that progress doesn’t seem to be there, we could see a piling of assets into gold,” Wen said. If so, he added, this would be coinciding with the autumn period that tends to mean increased demand for gold in India due to the “wedding season” and gift-giving holidays such as Diwali.
Flynn cautioned, however, that while the debt-ceiling limit is a potentially bullish factor for gold, the issue is only one of many that can push gold in either direction. Traders who only focus on one might end up missing the big picture. Nevertheless, as an example of the potential impact of the debt ceiling, he recounted that “people were buying gold like crazy” a couple of years ago amid worries about Eurozone debt issues and a default by Greece.
“The debt ceiling, while not as serious as that, creates that type of uncertainty. That would definitely be supportive for gold,” Flynn said. At the same time the market is wondering when the FOMC will start tapering its program of quantitative easing, Flynn said such a move might end up not being as bearish for gold as once thought. Investors in emerging-market nations could turn to gold as a store of wealth if their currencies weaken against the U.S. dollar as the Fed starts removing some stimulus, he said.
“So if you want to protect your value, you want to convert your currency into something that is going to hold its value,” Flynn said. “So because we’re seeing the emerging-market stock markets starting to really pull back because they’re worried about the lack of QE hot money and their currencies are getting crushed, the investment demand (for gold) is coming back.”
Natural Gas Report today as the market is still trying to recover from last bullish number. The trade underestimated the Impact of fuels switching back to gas for power generation. That of course is not only a short term story but a long term story as well. Reuters News reported that “Entergy Corp will shut the Vermont Yankee nuclear power plant, citing high costs tied to regulation and competition from cheap natural gas, bringing to an end a long battle with state politicians and environmentalists seeking to close the plant.”
“The 40-year-old plant, which generates three-quarters of the state’s power, will cease operations by the fourth quarter of next year”, Entergy said on Tuesday. Entergy’s announcement came just two weeks after a federal appeals court largely sided with the company in its fight to prevent Vermont from shutting down the only nuclear power plant in the state. Opposition to the plant has grown over the years, most recently focusing on a January 2010 disclosure of a leak of radioactive tritium. Still, the U.S. Nuclear Regulatory Commission granted the plant a 20-year operating license in 2011 that would have kept it running until March 2032.
But Leo Denault, Entergy’s CEO since February, said in an interview with Reuters that the plant was no longer economically viable due to a combination of rising capital costs after the September 11 attacks in 2001, Japan’s 2011 Fukushima disaster and low wholesale electricity prices stemming from cheap natural gas burned by competing plants. We did everything we could to keep the plant open,” he said, praising the 600 employee for operating the plant safely and efficiently even when “they did not feel welcome in the state.” Opponents of the plant were quick to voice their approval of the move. “This is not a big surprise to me and I don’t think it’s a big surprise to many who follow the economics of aging nuclear power plants,” Vermont Governor Peter Shumlin, a Democrat who led the state’s fight to have the plant shut down when its initial operating permit expired in 2012, told reporters.
The Fukushima crisis led regulators to review safety standards, which could burden operators with costly construction work and plant improvements. That came a decade after 9/11 caused heavy spending to tighten security around plants. “The financial impact of cumulative regulation is especially challenging to a small plant in these market conditions,” Entergy said in a press release. Surging output of shale gas, which sent natural gas prices to 10-year lows in 2012, has also weighed on the nuclear industry. Last October, Dominion Resources Inc’s Kewaunee plant in Wisconsin became the first nuclear plant to fall to cheap gas prices after hundreds of coal-fired plants had been forced to shut. With Vermont Yankee, a total of five U.S. nuclear plants are now shutting or in the process of closing down. Denault said Entergy is open to a settlement with New York State officials over the future of its controversial Indian Point nuclear plant, which is near New York City. Vermont Public Interest Research Group, a local advocacy group which has been lobbying for Yankee’s closure since the 1970s, said it felt vindicated by Entergy’s decision. “Entergy has finally – and perhaps for the first time – told Vermonters the truth about Vermont Yankee,” VPIRG Executive Director Paul Burns said in an emailed statement. “It represented a risk would could not afford for power we don’t need.” Vermont’s total energy consumption is the lowest in the country, according to the U.S. Energy Information Administration. In 2011, three-quarters of its power came from nuclear power, with another 21 percent from hydroelectric power.
“Closure of the plant will probably not have a large impact on natural gas markets, Thomson Reuters analyst Reza Haidari said, estimating it would lead to a 30 million cubic feet per day increase in U.S. natural gas consumption — less than 0.01 percent in the nation’s total demand.”
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