Energy report for Oct. 28

OPEC is losing the war on oil prices so they are dropping hints that will perhaps cut oil production yet again. The problem of course comes in when you try to cut and oil does not run. Oil prices continue to fall despite OPEC’s best efforts to stop them. The market tried to show some signs of life after OPEC Secretary General Abdalla Salem el-Badri suggested that OPEC might hold another second emergency meeting before its regular meeting in December yet ended the day dead on arrival. Mr. El-Badri said OPEC might add another production cut on top of the last 1.5 million barrels a day in an attempt I guess to add to the global economies misery. Of course you know the old saying, if at first you don’t succeed just cut, cut and cut again.

The truth is that another emergency meeting or talk of another production cut before the first one has had a chance to take hold is a sign of OPEC desperation. Even as Russian Presidential puppet Dmitry Medvedev says, “will enhance cooperation with OPEC to maintain oil prices” it is becoming clearer that OPEC has little control on what oil prices will do.

In fact with the market focused on demand destruction and a slowing economy the fate of oil prices probably lay more in the hands of Fed Chief Ben Bernanke than the boys in the evil cabal. A two day fed meeting begins today and should end with a 50 basis point interest rate cut seeing that oil has been keying off the stock market the reaction to the Fed cut and the ever exciting statement may have more sway over oil in the short run than what OPEC say’s it might do.

OPEC has a credibility problem. If the market actually believed that OPEC would comply to its last 1.5 million barrel cut plus two more cuts of 1.5 million barrels for a total of 4.5 million barrels less the market would rally. Yet there is no one that I know that honestly believes that they could pull that off.

OPEC can’t afford to pump less oil. Cash is king and they need cash as bad as everyone else. Yesterday the Wall Street Journal spoke of banking Problems in Kuwait in a strong sign that the credit crisis is hitting the Mid East the same as everyone else. With so many OPEC economies on the brink, do you honestly believe they can go without cash for very long?

There is joy in Pumpville. Now if the stock market has got you down and you are looking for something to celebrate, how about the fact that gasoline prices are cheaper than they were a year ago. Party! Well at least that is something. The Energy Information arm of the Department of Energy reported that retail gas prices plunged falling over a quarter in a week! The price of a gallon of regular gasoline fell 25.8¢ a gallon hitting 2.656! That is drop of 8.9% in just one week and the lowest gas prices have been price since March of 2007. Not only that, this is also the first time gasoline was actually cheaper that it was a year ago for the first time since Aug. 27, 2007. And not just a little cheaper. And the good news extends to diesel as well as truckers have gotten a break on the cost of gallon of diesel as prices have fallen to $3.288. Not as low as last but still the lowest they have been since Feb. 11. Of course not to bring you down because the news is not all good. One of the reasons why gas prices have fallen so hard is softening demand due to a softening economy. Gas prices and gasoline demand sometimes tells us more about the health of the US economy than some of our major economic reports. The reduction in demand suggests that things are not good. That might not be a surprise now yet drop in gasoline demand in the US was an early warning sign of the greater economic downturn to come. Gas prices were driven up unnaturally by global credit crisis as oil soared as investors looked for a safe haven. That created demand destruction bankrupting truckers and airlines as the prices got out of whack with the normal demand growth side of the equation. Bad news yes but at the same time the drop in price of gas and diesel is the start of the healing process for the economy as well. Lower costs for gas and diesel at some point start to ignite economic growth and we are already seeing some signs that demand may start to bounce back and at the same time a bounce back in economic growth. The other positive effect of lower gas prices is the ability of me to get my train seat in the morning. It is about time! Already I am seeing less people on my morning train which is a sign to me that people are moving back from record use of public transportation back to their cars. I know it is crazy but my train seat in the back of the Metra has been a great predictor of future gasoline demand trends.

Traders in petroleum need to continue to sell rallies. The market is oversold and we might correct higher yet long term players the next lower target if $56 per barrel. That does not mean you cannot make money on the long side. The best chance for a short term corrective pop in oil this week is ahead of the Wednesday inventory report or after the Fed Announcement. Do not forget to call for day-trades, short term trades and option plays.

Today is an exciting day as the Energy Report Community continues to grow! We are not only picked up on the website you are reading now but websites all over the globe! I especially welcome the new readers from the Futures Magazine Website where the Energy Report will be a new added daily feature. I hope you will join all my many other readers and share your questions and your insights even if that means straitening me out once in awhile! I always love to hear from you.

Phil Flynn is vice president of Alaron Trading and a Fox Business Network contributor. He can be reached at pflynn@alaron.com or at 800-935-6487.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.