"The history of Eureka lies in its future." - Lambert Molinelli, 1878


The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO) and Newmont Mining (NEM); together with benchmark miner Freeport-McMoRan (FCX). Please do your own research, markets can turn on you faster than a feral cat.

Wednesday, June 10, 2009

One-Armed Bandits and $71 Oil

Bloomberg News/Landov

Morning Miners!

It is 5:43 AM and the ole Colonel is back from his road trip. While pushing a lot of highway under my floorboard, an occasional stop at a filling station reminded me that slot machines aren't the only one-armed bandits in this state. That's right pardner, the gas pump sucked a lot bigger hole in my wallet than my last trip a month ago. I know we are entering driving season and gas prices are expected to rise, but as prices crowd 3-bucks there must be something else happening besides an increase in real demand.

What's going on? More and more folks that trade commodities are believing that the global economy is truly on the mend, plain and simple. After flirting with $70 oil last week, the NYMEX light crude futures closed above the seventy mark and opened in Asia this morning above $71, a 2009 high:

"Oil has soared as traders cheered news showing the worst of a U.S. recession is likely over, and brushed off data -- including a 9.4% unemployment rate in May -- that suggest crude demand will remain weak.
'I wouldn't be surprised if we're testing $80 in a week or two,' said Gerard Rigby, energy analyst with Fuel First Consulting in Sydney. 'The momentum right now is too strong.'
Prices have also been bolstered by a weaker dollar and expectations that large fiscal-stimulus spending could spark inflation." (WSJ, 6/10/09)

The Colonel admits that he cheered rising oil prices earlier this year since reflation in oil and metals (e.g. copper) were leading indicators of global recovery. It seemed that oil in the $45-$50 range wouldn't push production costs over the edge for miners who benefited from the higher price of their end product. When oil headed for $60, I bet that oil would return to $52 before $62 and the readers won a beer (see The Colonel's Beer Derby in the lower right column for other commodity bets).

Let's see how crazy things have got in just three months. One indicator of pump prices are the futures contracts for RBOB gasoline on the NYMEX. RBOB (pronounced R-Bob) stands for Reformulated gasoline Blendstock for Oxygen Blending. RBOB is a mouthful of grits but serves as a useful measure of gasoline wholesale prices. Here's the action:

NYMEX RBOB gasoline (July Contract) 3/11 $1.2676 low; 6/10 $1.9940 57.3% increase
NYMEX Crude Light Oil (July Contract) 3/11 $46.25 low; 6/10 $70.70 52.9% increase

And compared to the dollar and gold over the same period:

NYBT US Dollar Index (June Contract) 3/11 89.50 low; 6/10 80.01 10.6% decrease
COMEX Gold (August Contract) 3/11 $897.2 high; 6/10 955.8 6.5% increase

(Note: most active contracts quoted for 3/11/09 intraday low (high) and 6/10 early morning trading)

There is an old saying that you run with the market you have and not the one you think should be. Does a 10% drop in the dollar and signs of global recovery justify 50% increases in the price of RBOB gasoline and light crude oil? Stay tuned buckaroos and watch out for them one-armed bandits at the filling station!

Enough talk, let's walk the walk:

Oil is up $0.69 to $70.70 in early trading (July contract); Gold is up $1.1 to $955.8 (August contract); Silver is up $0.040 at $15.180 (July contract); Copper is down 0.0195 to $2.3460(July contract); Molybdenum sits smiling at $10.50.

The DOW is down 9.68 points to 8753.38; the S&P 500, down 2.61 points to 939.82. The miners are mixed:

Barrick (ABX) $35.79 down 0.91%
Newmont (NEM) $44.38 down 1.14%
General Moly (Eureka Moly, LLC) (GMO) $2.68 up 1.13%
Freeport McMoran (FCX) $59.29 down 0.56% (a bellwether mining stock spanning gold, copper & molybdenum)

Steel stocks are mixed (a "tell" for General Moly):

Nucor (NUE) $47.09 down 1.40% - domestic steel manufacturing
ArcelorMittal (MT) $34.70 up 0.06% - global steel producer
POSCO (PKX) $81.11 up 0.19%- South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 0.27%.


Colonel Possum

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