The Energy Report

The Energy Report
Phil Flynn
September 13, 2007

Oil at 80. Are the stars out tonight? I can’t tell if it’s cloudy or bright and that may depend on whether or not you're long oil. The bullish stars came into perfect alignment in an explosive trading session that sent oil out of this world. Oil surged to an all time not inflation adjusted high of $80.00 a barrel in a day that saw all the energy products soar.

Oil seemed on a mission to fulfill some technical destiny of $80.00 a barrel. It was a price level that was denied this summer as logistical issues kept oil undervalued for most of the summer. But sometimes things are written in the stars and the just wont be denied. It would be easy to point to yesterday’s wildly bullish inventory report as the main reason for the oil market's star search but in reality that was only a small part of the overall story. The market got just about anything a bull could want and perhaps even more.

Even before yesterday's inventory report the market had a strong upward bias. Oil had closed the day before at a record high as it laughed in the face of the OPEC production increase. Why did they raise production? Because OPEC cares. What they care about is a bit uncertain but they say they care all the same. Abdullah el-Badri, OPEC’s Secretary General, said that, “our message to consumers is that we are concerned and we care, and that is why we are raising production". Can you feel the love. Ah gee. OPEC cares about me! I feel special. And of course with OPEC - as always - the devil is in the details. And what you can sure about is what OPEC really cares about is covering their behind.

OPEC raised production because mainly they fear the backlash if the world goes into a recession. The IEA and the market have been sending signals to the cartel all summer that more oil was needed but they failed to act. Now OPEC has made a valiant effort by raising their quota from 25.845 million barrels a day to 27.2 million barrels a day which means that OPEC according to their math would be adding 500,000 barrels of oil. That’s not paper barrels but real oil for real men.

Yet because OPEC leaked its intentions early there was no surprise and the market discounted the oil as just replacing oil that was lost during the last two hurricanes. OPEC is proving once again that as a cartel they are very good at getting the price of oil from falling but they are always behind the curve and fail to stop prices from rising. Sometimes it is an issue of not having enough spare production capacity but many times it is because they are quick to cut but slow to raise production.

So then it was onto the weekly supply report from the Department of Energy. Would it give the bulls more reasons to buy! Well, before the stocks report even came out, natural gas bulls were already buying! This time it was because of the weather. A tropical wave that turned into a tropical storm Humberto caused havoc in the Gulf. The Houston shipping channel would close and there was talk that perhaps some oil rigs might be evacuated. Some weather experts fear that this active storm season will continue to cause more havoc and we may have to get prepared for one storm after another.

Then came the weekly inventory report. It was like a bullish dream. Crude supplies plunge 7.1 million barrels more than twice the average estimate. And that was and in all major categories. But even without the bullish report the mood for oil is bullish; decidedly bullish. The psychology after the OPEC announcement and the subsequent rally was a clear sign that the energy markets are poised to move higher.

Crude is convinced that a Fed rate cut is in store for next week and that should help keep the demand for oil much stronger than feared. The market is also showing that funds are getting an appetite for risk once again. Funds that fled from record long positions because they feared the housing slowdown perhaps are jumping back in. Even those without sub prime exposure fled from risk. Now they are coming back, a strong sign of confidence in our economic future.

Yes the backwardation being at near record levels could signal some slowing demand in the future but it also could signal a lessening of refiners worrying about geo-political risk. Let’s face it, with dealt with a lot of talk of the terror premium and war cutting off supply. Take yesterday, there was talk of the US making war plans against Iran and hardly anyone in the oil patch was talking about it.

Even talk about how Russian President Vladimir Putin rearranging the Russian Democracy in his own KGB image had little effect. No one in oil cared yet.

And we had a fire in Prudhoe Bay Alaska and cut production at a BP plant. We have refineries shutting down due to losing power in Texas we have it all. Aned this all means the bears are dancing in the streets.