The energy report for Nov. 4

According to yesterday’s Institute for Supply Management (ISM) manufacturing report, manufacturing experienced the biggest drop in 26 years and it was the second month in a row that manufacturers cut back production sharply. The ISM index came it at 38.9% in October, which was down from 43.5% in September and is at the lowest level since September 1982. MarketWatch says “The size of the decline was unexpected. The consensus forecast of estimates collected by MarketWatch was for the index to fall to 41.5%, as all regional manufacturing surveys were weak in October. Both new orders and production fell to their lowest level since the early 1980s. Readings below 50 indicate contraction. The ISM index had plunged in September to recession territory of 43.5% from 49.9% in August.” Manufacturing is in a recession and many small manufactures will be pushed further into despair by the Obama tax cuts. Layoffs are right around the corner.

Of course, a slowing economy is good if you are an oil bear right now .The ISM manufacturing index has always been a good indicator of future energy demand and with it being at recessionary levels I would expect recessionary like demand figures for energy. Demand for oil is being challenged globally as well as the dogmatic faith that oil bulls had put in the Chinese economy. I was blasted when I wrote about China bubbles and for suggesting that the Chinese economy could slow. Despite the fact that I gave readers an early warning that China oil demand was indeed slowing, many still did not want to believe that was possible. Yet yesterday, according to the Financial Times Wen Jiabao, China’s prime minister, warned that high growth was needed to maintain social stability as fresh evidence emerged that China’s economy was slowing quickly. The LA Times also wrote of problems in the China economy writing, “In the initial weeks of the global financial crisis, Chinese officials resolutely declared that they were not significantly affected. But now, as factory closings, dire corporate earnings reports and stock market losses continue to mount, the Communist Party's confidence has changed to another feeling entirely: fear.” The Times goes on, “For the first time in the 30 years since China began its capitalist transformation, there is a perception that the economy is in real trouble. And for the Communist Party, the crisis is not just an economic one, but a political one. The government's response offers a glimpse into its still ambiguous relationship with capitalism -- relatively hands-off in good times, but quick to intervene directly at the first signs of a downturn in order to prevent popular unrest.” Sounds kind of like U.S. Treasury Secretary Henry Paulson. Other analysts not only are lowering their price targets for oil (catching up to The Energy Report) but also substantially lowering their demand forecasts for China. One forecaster said that China’s demand growth would be zero in 2009. The LA times says that, “China's leaders have made a variety of moves to try to stabilize the economy -- three interest rate cuts in six weeks, new export tax rebates, reduced costs for home buyers, and billions spent on infrastructure. But any hope that a strong Chinese economy -- the single largest contributor to global growth -- would offset the slowdown elsewhere is gone.” Of course readers of The Energy Report have known that for some time.

Brazil is bopping! There may be a global slowdown but Brazil is making history in oil. Reuters news reports that Brazilian state-controlled oil giant Petrobras shipped crude oil at a record rate of 574 million barrels per day in October, totaling 17.8 million barrels. Reuters said that almost two thirds of the oil was shipped to the United States, followed by China, which bought nearly one quarter, and Europe and Latin America which both took around 5%.

Reuters says that Brazil hopes to join the ranks of the world's major oil exporters after the discovery of huge reserves under a layer of rock beneath the sea bed, which will be expensive to access but could contain 50 million to 80 billion barrels of crude. Yet will sustained low oil prices put a damper on that dream?

Oil, which was going lower most of the night, got a boost this morning on a larger than expected rate cut from The Reserve Bank of Australia. The bank cut its cash rate by three quarters of a percentage point and, according to MarketWatch, cited the effects of the global slowdown and falling commodity prices and fears that the current environment might lead to a downturn in domestic spending. That means there could be an increase in Foster’s Lager supply, so it is not all bad. Still the move hurt the Aussie dollar and also helped bring the dollar off its high horse and brought oil up and out of the hole.

We're short December crude from apprx 7439 - stop 7230!

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

Vice President and Senior Market Analyst

Alaron Futures and Options

(800) 935-6487

You can also see me every day on the Fox Business Network!

About the Author

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