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Today's Market WrapUp 02.12.2007 Mon Tue Wed Thu Fri Kirby Archive Crude
Revelations We hear much in the media regarding the cost of the war in Iraq in terms of lives lost – the human costs – and hardly a week goes by without some media account – or debate - of the war’s cost in dollar terms. “Even if the U.S. exits Iraq within another three years, total direct and indirect costs to U.S. taxpayers will likely be [sic] more than $400 billion, and one estimate puts the total economic impact at up to $2 trillion.” While it’s not my intention in this space to diminish the importance of these headline grabbing issues – I would like to draw the readers’ attention to a few additional crude facts. Most, if not all of us, are well aware that Iraq holds the world’s second largest conventional oil reserves. Heck, even the U.S. Government acknowledges this fact, “Nonsense aside, the sands of Iraq hold oil... lots of it. According to the US Energy Information Administration (EIA), "Iraq holds more than 112 billion barrels of oil - the world's second largest proven reserves. Iraq also contains 110 trillion cubic feet of natural gas, and is a focal point for regional and international security issues." And let's not forget the future potential; “While its proven oil reserves of 112 billion barrels ranks Iraq second in the world [sic] behind Saudi Arabia, EIA estimates that up to 90-percent of the county remains unexplored due to years of wars and sanctions. Unexplored regions of Iraq could yield an additional 100 billion barrels.” Interesting, isn’t it, that when one speaks of Iraq, crude oil and future potential, you intuitively know that a discussion relating to BANKING, FIAT MONEY and FUTURES cannot be far behind. Accordingly, I’d now like to draw your attention to a research paper published just last week by the good folks over at the Commodity Futures Trading Commission [CFTC]: CFTC’s Office of the Chief Economist Releases Study on “Market Growth, Trader Participation and Pricing in Energy Futures Markets” Washington, D.C. — The Commodity Futures Trading Commission’s (CFTC) Office of the Chief Economist today released a study titled “Market Growth, Trader Participation and Pricing in Energy Futures Markets.” This study provides an analysis of the composition of traders across different energy futures contract maturities and addresses questions relating to price discovery in these markets. Specifically,
Contributing to this study were Drs. Michael S. Haigh, Jeffrey H. Harris, James A. Overdahl and Michel A. Robe. I wonder how many of you might now be scratching your heads, wondering why – all of a sudden – in 2004, everybody and their mother decided to start “fiddling around” with crude oil contracts dated > 3 years? I must admit, I laid awake at night – tossing and turning – trying to figure out “WHAT HAPPENED” to FUNDAMENTALLY alter the business of crude oil futures trading. Sleepless In Seattle or Bullish in Baghdad If the truth be known, my curiosity about this might be more aptly described as ‘insomnia in Toronto,’ but it was while I laid awake one night that “IT” came to me: The “IT” that I’m referring to is something I remember reading a couple of years ago – about J.P. Morgan Chase being chosen by the Coalition Provisional Authority [CPA] to “set up” the NEW Central Bank of Iraq [specifically, the Trade Bank of Iraq]. Take note how this TRADE BANK only became operational in December of 2003:
I would suggest that we can even follow the genesis of the ‘mind set’ when we take a look at “The Administrator's Weekly Report” – Feb. 28 – March 5, 2004 where it’s all neatly explained for us: V. LAY FOUNDATIONS FOR AN OPEN ECONOMY Provide IG Staff Capability; Trade Bank; WTO Observer Status; Draft Intellectual Property law to IGC by April 15, 2004; Develop Framework for Collateralizing Movable and Immovable Property
So there you have it, folks. J.P. Morgan was chosen to head up the “new” infantile Iraqi Central Bank. They quickly moved to “collateralize” Iraqi assets [what else does Iraq have that the world needs besides OIL?] to rebuild [or redistribute the rubble, perhaps?] the country. Funny, isn’t it; that this “COLLATERALIZATION” just happened to coincide with an “explosion” in trading volume of “LONG DATED” [greater than 3 years maturity] crude oil futures contracts. We all know J.P. Morgan’s penchant for parades and to DERIVATIZE, don’t we? If one stops to consider the impact of trading “commodities + other” to J.P. Morgan’s revenue Q3/03 vs. Q3/06 – you will notice that revenue has gone from 50 million to 625 million [a twelve fold increase] in three years. This data is available at the Office of the Comptroller of the Currency’s Quarterly Derivative Fact Sheet [Q3/03 vs. Q3/06] in .pdf form. If Iraqi Oil has really has been pledged to “underpin” the explosive growth of trade in long dated crude oil futures – the crude reality is that the costs of “quitting Iraq” need to be reassessed yet again. Perhaps the crude reality is that the growth in long dated crude oil futures trade has more to do with a strategy to deal with PEAK OIL? Today’s Market Overseas equity markets began the week on an upbeat note with Japan’s Nikkei Index gaining 212 points to 17,504. North American markets didn’t share the same enthusiasm with the DOW ending the day down 28.28 to 12,552.55, the NASDAQ off 9.40 to 2,450.40 and the S & P giving up 4.70 to 1,433.35. NYMEX crude oil futures lost 2.08 to end the day 57.70 per barrel. Interest rates were approximately 2 basis points higher across the curve with the benchmark 2-year bond ending the day at 4.92%, the 5-year at 4.80% and the 10-year ending the day at 4.80%. On foreign exchange markets the U.S. Dollar Index gained .25 to finish at 85.00. Precious metals were under pressure with COMEX gold futures finishing the day off 4.50 to 663.70 per ounce while COMEX silver futures lost .19 to end the day at 13.74 per ounce. The XAU was weaker by 1.59 to 139.18 while the HUI gave up 3.17 to 336.89. On tap for tomorrow at 8:30 a.m., December Trade Balance data is due – expected – 59.7 Billion vs. prior – 59.2 Billion. Wishing you all a pleasant evening and a prosperous tomorrow! Rob Kirby Copyright © 2007 All rights reserved. Contact
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