The energy report for Nov. 10

The Teflon Dons of energy demand actually have to stimulate their economies in the hope of spurring more energy demand in the form of economic activity. China, which has in recent years has tried to slow its meteoric growth, has fallen so far that they now have to try to stimulate growth with a $586 billion stimulus package.

China is trying to put the fire back into their dragon economy, which according to some was never supposed to ever slow down in the first place. China was supposed to be untouchable when it came to energy demand, according to the myth that they and the rest of the world had decoupled from the U.S. economy. Yet now it's clear that those who believed we were decoupled were only decoupled from common sense. There are many signs China's once mighty demand growth for energy is faltering. China's power generation numbers are the weakest in years. Talk of factory closures and demand drops for metals, precious and otherwise. The type of demand growth numbers China was putting out before the Olympics was the result of China trying to put on a good show for the world. China had an economic growth spurt into the Olympics and an economic hangover after the fact. Add to the fact that the global economy is slowing and then you can see that China and their economy can actually slowdown as well. Now can China, after throwing billions into a massive infrastructure-building package, reignite that kind of pre-Olympic excitement?

And it is not just China. If China is slowing, then India is as well. Dow Jones News reported that car sales in India fell at their fastest rate in more than three years last month as stricter loan terms, high interest rates and increased fuel costs hit demand for vehicles. China and India’s demand for autos was the great hope for the US auto industry and the great upside potential for increasing gas demand. In the U.S., auto sales fell in October for a twelfth straight month, which according to Bloomberg News was the longest streak in 17 years. This they say, overwhelmed efforts by GM, Ford and Chrysler to cut costs by trimming payrolls and shutting factories.

In the mean time, the market has been less than impressed with OPEC production cuts. They have been supportive but have not ignited enough passion to overcome all the negatives on the demand side. We know that the oil producers are going to feel the impact of these lower energy prices. The latest concern comes from Dow Jones newswires that reports that Mexico risks a revenue shortfall next year due to falling oil prices and production that will be only partially offset by a weaker local currency. Dow says that Mexico based its 2009 budget on an average oil price of $70 a barrel for its low-value grade of crude oil. As of Thursday, Mexico's average crude price closed at $43.65 a barrel. Even more cuts in production might not help them out.

And what does that mean for gas prices. Well according to my buddy, the goddess of gasoline Trilby Lundberg, who said U.S. gas prices fell by a whopping 48 cents in just the last two weeks. According to Lundberg, the average price of a gallon of regular gasoline at self-serve stations was $2.30 Friday. Mid-grade was at $2.44 and premium was at $2.56 and Diesel at $3.19. Trilby says that gas was cheapest in Tulsa, Oklahoma, at $1.89 for a gallon of regular. It was most expensive in Anchorage, Alaska, at $3.14. In California the average was $2.57 down even more than the national average falling by a stunning 61¢ per gallon in two weeks.

So with this latest rally should we add on more if you are still long riding losses? As big as the move is, we are still trading in a range. Oil has yet to prove it can stay over $70 and stay there.

Yes, we are still short oil and loving it!

We're short December crude oil from approximately 7439 - stop to 7210!

Buy December heating oil at 18000 - stop 17600.

Sell December RBOB at 16000 - stop 16400.

Buy December natural gas at 515 - stop 500.

Phil Flynn

Alaron Futures and Options

(800) 935-6487

About the Author

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