12/17/2009

The Feds got to admit it’s getting better, better, a little better all the time. It cannot get no worse. The Fed has to admit it’s getting better, better. It’s getting better since you’ve been mine, getting so much better all the time.

The Fed did not give us an exit strategy but they did give us a timeline (oh no, now the enemy can wait us out) for ending purchases of mortgage backed securities. They see a pick up in the economy and a slow slowdown in the deterioration of the jobs market. Getting so much better all the time, it’s getting better all the time, better, better, better, it’s getting better all the time, better, better, better.

Ok I would like to tell you that oil demand is so much better. I would like to tell you the crude draw was wildly bullish but to do so probably is overstating the case. In fact despite the big run up yesterday, while in part inspired by a larger than expected drawdown in crude supply, part of the reason we went as high as we did was the reports of that missile fired in Iran.

Oh sure the fact that the Energy Information Agency of the Department of Energy reported that commercial crude oil inventories fell by 3.7 million barrels was a bit of a shock and higher than the 3 million barrel drawdown I had predicted, the truth of the matter is that if you look at why supply fell it had little to do with demand and everything to do with transportation issues. Refinery runs (refiners turning crude oil into product) did not go up and in fact they fell. The EIA reported that U.S. crude oil refinery inputs averaged 13.8 million barrels per day which was 117 thousand barrels per day from just last week. Refineries operated at only 80.0 percent of their capacity. The production of gasoline and distillate stocks (heating oil, jet fuel, and diesel fuel) actually fell. So the question is that if we used a lot less crude then we did the week before, why did supply of crude fall so hard?

It appears the biggest drop in supply occurred in the Gulf Coast which would lead me to believe that it had something to do with imports. According to Energy Information Agency data, US crude oil imports averaged 7.8 million barrels per day last week, down 365 thousand barrels per day from the last week and over the last four weeks they have averaged 8.3 million barrels per day, 1.4 million a day from a year ago. The Houston shipping channel, a major import artery, was closed due to fog and might explain the larger than expected drop. In other word, unless refiners use a lot more crude this week and next, there is a backlog of supply that will probably show in next week’s report or fog permitting, the week after.

That is not to say there was not some impressive demand. Heating oil demand was strong as a winter chill helped eat into supply. Gasoline demand is above a year ago. Over all the Energy Information Agency reported gasoline demand at 9.0 million barrels per day, up by 1.0 percent from the same period last year. Distillate fuels demand at 3.6 million barrels per day down by 6.6 percent from last year. Jet fuel demand is up 4.6 percent over last year.

It seemed that oil rallied after the Obama administration condemned the firing of an advanced missile by Iran. The Associated Press said that Iran test fired an upgraded version of an advanced missile capable of hitting Israel and parts of Europe, an apparent show of strength aimed at discouraging attacks on its nuclear facilities. The test of the medium-range Sajjil-2 fueled calls for tougher sanctions against Tehran, which has resisted U.N. demands that it rein in its nuclear ambitions. Iran touted the launch as a success proving it can deter any U.S. or Israeli military strike against its nuclear facilities. The AP goes on to say that the test was the third for the Sajjil-2 since it was unveiled in May. The missile has the longest range of any in Iran’s arsenal, about 1,200 miles, putting Israel, Iran’s sworn enemy, and U.S. bases in the Gulf region, well within reach. It could also reach parts of south-eastern and eastern Europe.

This may renew rumors in the energy pits of a possible strike by Israel on Iran’s facilities. For months traders have talked about the possibility of a strike by Israel on Iran before the end of this year. That talk had died down somewhat but this provocative act by Iran may get the rumor mill rolling again. For oil it is rock and roll over. Yesterday the options for January expired and the focus will shift to the holidays and the February contract. Due to the contango we may see the trading range get skewered a bit to the upside. The high end of the larger trading range should be around 77 and the lower end near 67 for crude. We still feel that oil will break to the downside before we can resume a solid uptrend. We need to see a spike in demand to start to work off that excess supply. Natural gas looks technically strong as we should see a big drawdown in supply. I think it should be in the minus 180 range.

Phil Flynn

PFGBEST Research Team
(800) 935-6487
pflynn@pfgbest.com