The energy report for Nov. 3

On the right side of history: Congratulations to all the readers of The Energy Report because once again we are on the right side of history. Forget about the election because oil is making its own history.

Crude oil ended the month of October with the biggest down move in the history of oil and The Energy Report readers were riding the short side pretty much all the way down. In a year filled with a lot of bull, the bears ruled the month of October and may control oil for the rest of this year. I am thrilled that so many of you were able to take advantage of it and have heard from many very happy traders! The market had to face facts in October and had to adjust to a rapidly deteriorating worldwide demand equation not to mention a suddenly resurgent in the US Dollar. Oil prices and its moves this year have reflected these times of historic upheaval in the world economy. The carry trade got carried away and it was time for the market to adjust to some of the cold hard economic realities. The people that say this was a case about speculation or the ones that said that this was all about the peak oil production theory are all wrong because they are missing the point and the historic significance of this move. This was all about the price of oil adjusting itself to a new world economic order and the price of oil adjusting to the fears and the constantly evolving economic crisis.

Now earlier this year I was surprised that oil could soar as high as it did in the backdrop of all these major economic issues. I did not believe for one minute that the world had decoupled from the US economy. Yet that belief was prevalent and oil reflected that belief. Of course, at that time the evidence of the economic crisis was unclear to some because they did not want to look into the future. It was a sense of denial that things were really that bad. The future of what should happen never entered their minds because they were just focused on finding a safe haven place to park some cash. Yet even while going for long for long stretches of time I knew that this safe haven against the dollar and against systemic risk in the economy could not last. That is why I held on to my bearish view.

If oil continues its current trend, I am on target for beating everyone on the street for the average price of oil for the year. According to a survey by Dow Jones Newswires, we had the lowest average price for oil for all of 2008. If oil trades to the low fifties between now and the end of the year, we will hit it right on. As it is right now there are only two other firms that are in contention yet for them oil cannot fall too much further. Of course, we have beaten everyone on the street on more than one occasion and consistently our long-term price targets for the year are always right up there with the best of the best. Yet this year when you beat the street, you find out there is not much of the street left.

As bearish as oil has been lately there are signs that things at some point will turn around. Gregory Meyers in today's Wall Street Journal writes about the fact that we are already planting the seeds for the next bull market to begin. He reports that, "While oil may be at its cheapest in months, prices reveal a market with serious concerns about long term supply." Meyers looks to the back months for evidence saying, "As recently as last summer, December 2008 and December 2013 crude-oil futures on the New York Mercantile Exchange cost the same. Now, the 2008 contract is $21.50 a barrel below 2013, an unprecedented discount." Meyers says that, "a pause in the march of world demand helped topple crude from record levels from above $145 a barrel. But the current weakness could set the stage for an explosive move when consumption takes off again. Analysts say the fall has been so steep it could diminish investment in new supplies that are only profitable in a high-price environment." Now add the fact the Senator Obama wants to bankrupt the coal industry the next massive bull may not be too many years away.

Still short term what could go wrong for the bear side of the market? On Friday we saw oil turnaround in a typical end of the month short covering rally. Yet does this bode well for a turnaround? Inventories seem ample. US Crude oil supply is 1.2% above year ago levels. Gasoline supplies are 2% below year ago levels yet demand is much below year ago levels. Considering that we went through a hurricane or two that is not half bad. Distillates are 5.8% below a year ago, a potential trouble spots if demand increases. Also keep an eye on OPEC to see if they can comply with their agreed upon cuts. Dow Jones Newswires said that Organization of Petroleum Exporting Countries' decision last month to slash oil output by 1.5 million barrels a day from Nov. 1 would not immediately shore up crude prices quoting the cartel's chief said Sunday. This decision, "will take a long time to take hold" because the demand for oil has still not reached OPEC's revised production level, the Algerian Energy Minister and current OPEC chief Chakib Khelil told local radio. At an emergency meeting in Vienna last month, OPEC ministers agreed to reduce output by 1.5 million barrels a day to 27.3 million bpd from Sunday in a bid to prevent prices falling further. "A number of countries including Algeria, United Arab Emirates, Iran and Nigeria, have already announced a decrease in production," Khelil added. Despite U.S. and U.K. criticism of the cut, Venezuelan Energy Minister Rafael Ramirez later said the cartel must cut at least another 1.0 million barrels from its oil supply in December before next month and has already informed its customers."

The other key for oil is still the dollar and the stocks. We still are targeting $56 a barrel for oil. We will be selling rallies. Day traders can be long or short! Call me for the latest at 800-935-6487 or email me at to open your account! Happy Monday, as if that isn't an oxymoron.

We're short December crude oil from approximately 7439 - lower stop to 7300!

Buy December heating oil at 18000 - stop 17600.

Sell December RBOB at 16100 - stop 17400.

Buy December natural gas at 515 - stop 500.

Phil Flynn is vice president of Alaron Trading and a Fox Business Network contributor. He can be at 800-935-6487.

About the Author

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