The Energy Report

7/2/2009

Life Liberty and Oil!

When, in the course of human trading events, it becomes necessary for one market to dissolve the fundamental bonds which have connected them with another, and to assume among the powers of the market, the separate and equal station to which the laws of supply and demand and of nature’s God entitle them, with a decent respect to the opinions of the buyers and the sellers requires that they should declare the causes which impel them to admit that we have a fair price for oil. We hold these truths to be self-evident, that all traders are created equal, that they are endowed by their Creator with certain unalienable rights that among these are life, liberty and the pursuit of profits.

That to secure these rights the markets are instituted among men and women deriving their just powers from the consent of the hedgers and the speculators. That whenever any form of long or short position becomes destructive to these ends, it is the right of the position holders to alter or to abolish said position and buy or sell it, and to institute new position, laying its foundation on such principles and organizing its portfolio in such form, as to them shall seem most likely to affect their safety and happiness.

Let freedom ring as in free markets for a free people and the freedom of the market to at times to move away from what people feel should be a fair price for oil. What is a fair price for oil? What better time to ask this question as oil is locked in a trading range just below 8 month highs as we head into a the 4th of July holiday weekend. More and more people are telling us that the price of oil is not supported by the fundamentals or at the very least their perception of what the fundamentals are. Of course the true value of having a marketplace is to establish a fair price for oil even when at times it seems to be defying rational expiration. If we all new what a fair price for oil was on a given day or time or if the market only did what we thought it should do, there would be no need for the markets in the first place. The markets are here to bring transparency and to shed light on fundamentals that might not be immediately clear. And sometimes to make sure things are correct, the market reacts, and yes sometimes over reacts, to assure a stable supply of product in the future.

Oh sure yesterday the oil market responded bearishly to the Energy Information Agency weekly supply report whose biggest fault against the bull market was it was not as bullish as the American Petroleum Institute from the day before. Still there are those that believe that the market has disconnected with the fundamental realities and point to this report as evidence that the oil markets have disconnected from supply and demand.

The EIA reported yesterday that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 3.7 million barrels from the previous week. At 350.2 million barrels, U.S. crude oil inventories are above the upper boundary of the average range for this time of year. Total motor gasoline inventories increased by 2.3 million barrels last week, and are in the lower half of the average range. Both finished gasoline inventories and gasoline blending components increased last week. Distillate fuel inventories increased by 2.9 million barrels, and are above the upper boundary of the average range for this time of year. But what really gets the bears is the fact that total commercial petroleum inventories increased by 4.4 million barrels last week and are above the upper limit of the average range for this time of year and that demand is so bad.

How can you have prices rise when demand is so bad? There were no fireworks on the demand side as the EIA reported that total products supplied over the last four-week period has averaged 18.4 million barrels per day, down by 5.8 percent compared to the similar period last year. Over the last four weeks, motor gasoline demand has averaged nearly 9.2 million barrels per day, up by 0.9 percent from the same period last year. Distillate fuel demand has averaged about 3.4 million barrels per day over the last four weeks, down by 9.4 percent from the same period last year. Jet fuel demand is 13.2 percent lower over the last four weeks compared to the same four-week period last year. It is the less than spectacular supply and demand numbers, especially compared to a year ago, that leads market critics to say the market is out of whack with the fundamental realities.

Yet think about where this market was a year ago. We were hitting the height of a bullish friendly. The 4th of July week oil hit a high of $145 a barrel. Gasoline was $4.10 a gallon. We were being told that oil had no place to go but up. That the world had hit peak oil production and that the rest of the world had decoupled from the US economy and despite the fact of weakening demand in the US, the rest of the globe was immune from our little sub-prime crisis woes would consume higher and higher prices for oil no matter what. That high oil prices were the new norm and few people seemed to question reality. Now some of those same people who believed that last year prices were ok are now questioning whether they are too high today. That is despite the fact that oil prices over 50% lower than they were a year ago and gas prices are $2.61 a gallon as compared to $4.10.

And the fact that when we compare today’s value of the dollar it is worth substantially less then it was a year ago. But it is more than just the change in the intrinsic rate of the dollar but about the global confidence in the dollar that effects what oil and other commodities might be worth. Remember it is the futures market function not just to price in current supply and demand but to anticipate future trends of supply and demand as well as including but not excluded to increasing risks of the geo-political and exchange rate variety.

It is the markets job at times to raise price ahead of an expected demand surge or production drop to help ration supply. That function is to ration supply to assure the availability of supply. Other times it is trying to unmask signs of stress in the global economy sending up flairs or red flags that something is wrong. Something seriously wrong like say the greatest financial meltdown since the great depression. Too many times market critics want to blame speculators or the market when they do not agree with the price but then they miss the message the market is trying to send. They want to kill the messenger instead of listening to the message. Hey it was not Paul Revere’s fault that the British were coming. (Or the “regulars” as the history buffs would tell you). You could blame the message and be bound to the ropes of tyranny of chose to listen to the warnings and celebrate your freedom to reacted to what the free market are telling you! Sometimes the most important value of a free market is to convey to us not we think is correct about the fundamental outlook, but to tell us something we do not know. It is to open are minds to a greater reality that perhaps we are somehow missing. Free markets for free men and women!

Do your patriotic duty and watch me on the Fox Business Network each day! And especially on a special “Money for Breakfast” on the 4th of July! Also exercise your right to transfer your account to PFG Best Research! Are you with the best? Call me to find out at 800-935-6487 or email me at pflynn@alaron.com! Have happy 4th and celebrate it by solemn Acts of Devotion to God Almighty with Pomp and Parade, with Shrews, Games, Sports, Guns, Bells, Bonfires and Illuminations from one End of this Continent to the other from this time forward forever more.

Buy August crude at 6700 – stop 6560.

Buy August heating oil at 16800 – stop 16300.

Buy August RBOB at 17800 – stop 16900.

Stopped on long August natural gas from apprx 384 at apprx 377.

Phil Flynn

Alaron Research Team
800.935.6487
pflynn@alaron.com

There is a substantial risk of loss in trading futures and options.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. Alaron Trading Corp. its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.