Energy report: Fundamentals turn bearish

Oil prices plunged as the drop oil inventories just is not all it seems. Oil has broken down into its lower trading range and now may target $65.Yes, oil fell even as the dollar fell. The prospect strengthened as the prospect of a stabilizing job market and rising oil product supply has taken the focus off the dollar for a time being and has put it more towards rising supply.

Oh some thought that when the Energy Information Agency reported that U.S. crude inventories fell by 3.8 million barrels, it would be enough to move the market higher. But the fact that crude supplies surged at the NYMEX delivery point in Cushing, Oklahoma and the overall drawdown in supply was less than the API, it magically made what looked like bullish number actually bearish. And as Barbara Powell at Bloomberg points out that at 336.1 million barrels crude supply is still 7.2% above the five-year average.

As far as products, the Energy Information Agency reported that motor gasoline inventories increased by 2.2 million barrels last week. That puts gas supply 4.8% above the five-year average. And if you want some news to make you feel toasty the supplies of distillates, which include heating oil, increased by 1.6 million barrels which put them a whopping 24.7% above the five-year average. That’s almost better than having an extra pair of ear muffs. Total commercial petroleum inventories decreased by 4.3 million barrels last week, and are above the upper limit of the average range for this time of year.

With the failure of crude oil to take out $70 a barrel, that now becomes the key number to play off of. We feel that the $65 handle is in our future but at this point the $70 a barrel area may put up a fight. Despite the cold weather, we have been telling you for some time that it will be cheaper to heat your home this winter. There was an article from Reuters that had great news for consumers about natural gas. They reported that U.S. natural gas consumers should pay less to heat their homes this winter, not only are inventories exceptionally high, but utilities paid a lot less this year for their stockpiles.

The writer Joseph Silha says that while cold spells could firm spot, or daily, cash prices, inventories provide more than 20% of the total used for heating, and utilities could tap more cheap storage gas if cash prices climb too high. Silha says that the average cost of Gulf Coast gas stored in inventory by utilities to help meet winter heating demand is roughly $4.50 per million British thermal units, about 60% below last winter's level, according to Reuters data. That should spell good news for the 58 million U.S. households, or more than 50% of the total, that use gas to heat their homes. This winter they can expect to pay about $778, or 12% less than last year and their lowest tab in six years, according to the U.S. Energy Information Administration. Gas is also used to produce about 20% of the nation's electricity, and homeowners and businesses could catch a break there too.

By contrast, homes that heat with oil are likely to see winter bills go up by about 3% to an average $1,900. The main reason is a supply glut. Silha says that despite a fairly cold winter last year, high first-quarter production and deep cuts in industrial demand, which accounts for nearly 30% of total consumption, set the stage for this year's inventory glut. While drilling dropped sharply early this year, production has been slow to decline. Then a mild summer and little or no heating demand this fall helped drive supplies even higher. Recent data from the U.S. Energy Information Administration showed total domestic gas inventories hit a record high for the 10th straight week, climbing to 3,837 billion cubic feet. A great read that you can find on the web.

Another important read is from the Energy Information Agency in “This Week in Petroleum” report. They focus on Asian oil demand and say that with the emerging Asian economies rebounding from the global economic downturn faster than the G-7 economies, the Asia-Pacific region is the leading driver of global economic recovery and higher oil demand. Although the emerging Asian economies were generally less exposed to financial risks and credit default arrangements than the U.S. and European economies, many of them have taken strong stimulus measures throughout 2009 that are expected to boost domestic demand, financial credit, and greater investment in transportation and infrastructure. Growth in oil demand will follow the increases in economic activity. The region’s oil demand declined for four consecutive quarters during the second half of 2008 and first half of 2009 as a result of severely declining export-led sectors; however, by the third quarter of 2009 the region’s oil demand was above its level in the third quarter of 2008.

The current global recession has affected Asian countries to varying degrees. EIA expects regional GDP, on an oil-consumption weighted basis, to grow by less than 1% in 2009 from the prior year. Despite the upturn in oil demand in the second half of 2009, EIA’s forecast shows the first annual average oil demand reduction in Asia since the Asian financial crisis in 1998.

In other words, despite the fact that China’s stimulus fueled fuel frenzy, demand is still not at pre crisis levels so the market has most likely priced in a lot of oil demand growth. And while demand in the U.S. and other countries are just a shadow of its former self, it is possible that oil prices could fall even as demand rises. The Chinese have set a high bar and if their demand falters the price of oil will fall hard.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

A new day for The Energy Report, now you will have to be logged in to see trade recommendations. This will allow us to put on more complex trades and even in the near future intraday updates. It is becoming obvious that with the increasing volatility that one trade recommendation in the morning without the ability to adjust it during the trading day is becoming more difficult. This will allow us to enhance trades and allow us make adjustments as the day goes on.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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