Contango and confused, the oil market is still desperately trying to find its own personality as it tried to ignore the rest of the macroeconomic news all around us. With September crude in its final hours, it somehow did not seem right to set a new high price for the year by default. October crude came down in a collapsing contango that kept oil from setting a new high for the year. So today if oil is going to break through to new heights, the October crude is going to have to do it on its own merits.
The spread between the front and the back months in oil and whether or not that would mean a new high price for the year was really just a minor footnote in the history books as compared to the spread between the price of oil and naturals gas. The gap between U.S. natural gas and oil futures prices reached the widest margin ever. Dow-Jones did the math showing that the spread between natural gas and crude expanded to about 24.5 to 1. The ratio since the Nymex gas contract began trading in April 1990 historically has varied between 6.5 to 1 and10 to 1. Now gas demand is plummeting and new onshore gas production from shale rock may be setting a new standard.
Earlier this year for the first time ever, proven natural gas reserves in this country actually went higher. New technologies like "fracking," which is basically shooting water and chemicals into rocks to force the gas out, or old reservoirs is taking more production on shore as opposed to off shore. At the same time because the U.S. gas market is mainly a domestic market it is less impacted by the value of the dollar and global exchange and shipping rates. Normally when the gas oil spread widens you see switching to the cheaper fuel but because the spread has been so wide so long anyone that was going to switch probably already has done so. Industrial demand for gas has plummeted as has electricity driven demand as we have had a cool summer.
We have a natural gas glut. A glut that was thought to be unthinkable just 5 years ago when the world thought that U.S. gas production had peaked. A time when then Fed Chairman Alan Greenspan said that the ability to supply our nation with natural gas was a major threat to our economy. At that time the chairman said that the United States needed to expand the global trade in natural gas as a way to prevent future sharp price increases from harming its economy. Mr. Greenspan underestimated the ingenuity that high prices could bring and our gas crisis would not be solved by imports but by technology. Of course at that time environmentalist were appalled at the prospect of building LNG plants. Now they are unhappy with fracking. The bottom line is you can never please an environmentalist.
Oil prices are surging on strong data out of Europe! Reuters reports that, "the decline in the euro zone's dominant services sector almost came to a halt in August and businesses' expectations for the future soared to their highest level in more than two years," a key survey showed. Data also showed manufacturing activity contracted at a far slower pace than expected and output rose for the first time in 15 months, suggesting that the broad euro zone economy has stopped contracting after its worst recession on record. Markit's Eurozone Flash Services Purchasing Managers Index (PMI), compiled from surveys of around 2,000 companies, climbed to 49.5 in August from 45.7 in July, its highest since May last year and smashing expectations for a rise to 46.5. Euro zone government bond futures fell to a session low after the figures after getting knocked down earlier on the companion German PMI data, which also came in above expectations.
The Fed may be the oil bull's biggest fear. Big Bad Ben Bernanke will give a speech today at the Kansas City Fed Economic Symposium in Jackson Hole, Wyo. The title of Bernanke's speech is, "Reflections in a Year of Crisis." Soon to be a major motion picture we're sure! Traders do not want reflections they want to hear about an exit strategy. Dallas Fed President Richard Fisher though seemed to suggest yesterday that the Fed may end its quantitative easing program sooner rather than later.
Can Iran live without petrol? The Obama deadline on sanctions on Iran is September and unless the Iranians agree to take on a six-power offer of talks on trade benefits if it shelves sensitive nuclear enrichment, the Obama administration has hinted it would cut off gasoline supplies to Iran. While Iran is the world's fifth-largest crude exporter in the world its refineries lack the capacity to meet domestic fuel demand so it imports up to 40 percent of its gasoline. Yet as Reuters' news reports President Mahmoud Ahmadinejad shrugged off the impact of any sanctions targeting Iran's gasoline imports and suggested it would soon be able to meet its own needs. The semi-official Fars News Agency quoted him as saying: "The Iranian nation is no longer afraid of any threat or sanction."
Stopped on short October crude from apprx 7250 at apprx 7320.
Sell October heating oil 19500 - stop 19700.
Sell October RBOB 20550 - stop 20900.
Buy September natural gas at 270 - stop 248
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or pflynn@alaron.com.
