Cheaters never prosper. Well at least not in the long run anyway. Did OPEC just cheat themselves out a few bucks a barrel?
It's entirely possible that's exactly what they did. The market seemed to frown on the lack of compliance from the OPEC cartel, which stands now only at 66% and that is a failure in anyone’s book.
Oil prices fell as questions about OPEC compliance raised another question on whether OPEC can actually follow through with the agreed upon production cut in December. As the OPEC pie continues to dwindle, tensions in the cartel continue to rise. Once again it seems that OPEC likes to say one thing but then go pump another. According to a Reuter’s survey OPEC members only complied with 66% of their agreed upon production cut and what Reuters called a, “limited supply cut from Venezuela, Iran.”
A limited supply cut from the two biggest hawks in the cartel? The ones that scream the loudest seem to cut the least. Oh yes, they love production cuts as long as they do not have to do the cutting. At the emergency meeting in Cairo last week, Gulf oil producers said that compliance was the key to another production cut. So far, that is not happening. How bad was it? Reuters says that total OPEC oil supply fell in November for a third consecutive month. Supply from OPEC fell to 31.2 million barrels per day in November down from 32.17 million barrels per day in October. But the members held to quota pumped 28.07 million barrels per oil a day when they were only supposed to pump 27.3 million barrels a day. Tisk, Tisk!
Perhaps oil was also pressured by the fact that the Energy Information Administration (EIA) petroleum supply report is expected to show an increase in supply for the tenth week in a row. The EIA shows that crude oil inventories are already well above average range for this time of year and are expected to get larger.
Can crude oil make it ten in a row? I guess oil will make a ten-peat as U.S. crude supply is expected to rise for the tenth week in a row. Crude stocks are expected to rise by 1.4 million barrels, according to Dow Jones Newswires survey or 1 million if you look at the Bloomberg survey to pad an already well supplied crude market. As of last week, U.S. crude supply stood 6.2% above one year ago levels. We have been seeing huge imports and increasing domestic production as Gulf production that was hampered after Hurricane Gustav and Ike continues to try to get back to normal. A lot of market focus will be on the Cushing, Oklahoma delivery point for crude supply that is at a very high level.
Distillate supply is expected to rise by 700,000 barrels. Supply still a bit below the five-year average and below 5.9% below one year ago levels. This is the soft spot in the complex. The market is concerned that a cold winter will rally heating oil this year. Still those concerns seem to be offset by the fact that refineries are kicking it up a notch and that demand global for distillates will be a lot less. For example, take this Dow Jones report that said supplies of gasoline and diesel hit new highs in October in China quoting China’s state Media. Supply hit new highs despite China cutting imports “drastically”. Which means U.S. exports will be less.
For gasoline it is all about demand. The EIA showed that gasoline demand over the last four weeks, motor gasoline demand, has averaged about 9.0 million barrels per day, down by 2.8 percent from the same period last year. Distillate fuel demand has averaged 4.0 million barrels per day over the last four weeks, down by 2.2 percent from the same period last year. The thing that the bulls are hoping for is that demand will rebound. Still that may matter less as the global slowdown adds to spare capacity and extra supply.
Gone with the windfall! Remember when President Elect Barrack Obama was going to take the money away from the evil oil companies and take those profits and spend it on alternative fuels? Well it seems that those ideas are gone with the wind. Or is it gone with the wind farms? The Houston Chronicle reports that President-elect Barack Obama has quietly shelved a proposal to slap oil and natural gas companies with a new windfall profits tax. The Chronicle says that an aide for the transition team acknowledged the policy shift Tuesday, after a small-business group discovered the proposal - touted throughout much of the campaign - had been dropped from the incoming administration’s Web site. “President-elect Obama announced the policy during the campaign because oil prices were above $80 per barrel,” the aide said. “They are below that now and expected to stay below that.”
So it appears that when President elect Obama talks about change you can believe in, what he really meant was he'd be changing his position on every issue after he secured the election. It's not a bad change on this issue because he realizes that a windfall profit tax always hurts the average American. It will cost U.S. jobs and outsource our energy security to other countries. But as we're seeing from his cabinet picks, from Gates to Clinton, it appears change is not so much change as it is a state of mind!
My state of mind still is to sell rallies! Yes, we have not changed, as we are still short after all these months! Are you? If you are not, perhaps it is time to open your account. Just call me at 800-935-6487 or email me at pflynn@alaron.com. And seeing that change is the current buzzword, you should change to the Fox Business Network where you can see me every day! If you don’t get it then call your cable operator and demand it! And call me at 800-935-6487 to open your trading account!
We’re short January crude oil on the double rollover from approximately 5760 - lower stop to 5470!
We're long January heating oil from approximately 16000 - stop 15650.
We're long January RBOB from approximately 10700 - stop 10200.
Buy January natural gas at 615 - stop 570.
Phil Flynn is vice president of Alaron Trading and a Fox Business Network contributor. He can be reached at (800) 935-6487 or pflynn@alaron.com.
