A buying frenzy, driven by interest rates?

The theme for the past few days has been rising long interest rates in the US, particularly the long end. Just 2 days ago, S&P closed below 900 as yield begun its ascend, troubling some investors that rising long term rates at this juncture could harm recovery. Just where the recovery is coming from is another question SFOT could not bring to discuss at this moment. Having met a few contact from the HF world yesterday and hearing them arguing in the most convincing way why this rally in all asset classes have no legs, only to admit they are long in most asset class as the trend is so, suggests going against this upmove is treacherous. At this juncture, SFOT would guess rates should play a bigger role in determining global asset direction, i.e lower rates = all asset classes rallying, which is happening this morning in london.


In oil, we have seen another big draw in DOE crude inventories, which is the 4th consecutive draw in May. One would suspect this is the beginning of a trend which should see stock level continue to draw and it please OPEC to the extend they do not need to cut anymore production. Prices rallying to $66today also provide a better receipt than just 2 months ago for OPEC countries as they are now sitting more comfortably. SFOT sees stocks continue to draw down on crude, only due to supply cuts.

With prices here, the potential for demand to take further hits will be bigger and thus the economics for products that are already having a supply overhang is going to be worse, i.e middle distillates. Although SFOT is more bullish gasoline, he is now rethinking if prices at almost $2 /gal will have a bigger detrimental effect on demand. Looking at the charts below suggest that other than the last data point, we have not seen any seasonal pickup in Gasoline demand yet.

(chart 1 = typical gasoline demand pattern in a calendar year, chart 2 = YTD)