A new decade begins in energy trading with new challenges and obstacles in the markets' mission to assure the availability of supply. As the new decade begins, the greatest challenges ahead are said to be “peak oil” and global warming yet today the new decade in energy starts out worrying about the cold. The oil market and heating oil markets are soaring as the country is getting a big chill from coast to coast. The cold weather has gone global with cold temperatures even being reported in Europe and China. In the short term the polar bears have nothing to worry about as global warming takes an extended holiday.
Traders are focusing on the dramatic drops we have seen recently in distillate stocks. The last few weeks as our ears freeze, the market is pricing in an even larger drop. Oh sure, distillate supplies are still 17.4% above the five-year average but the reports of cold and low refinery runs are raising fears that will continue to cut away at that advantage. The same fears are supporting natural gas despite the fact that the Energy Information Agency reported that working gas in storage was 3,276 Bcf as of Friday, Dec. 25, 2009 which was 379 bcf higher than last year at this time and 391 bcf above the five-year average. Of course if it stays cold that does not seem to matter. Matt Rogers at Commodity WX says that this powerful cold outbreak will last until early next week. Then we will see a warming trend but it will not last. We are going to see this arctic blast hang around for awhile. It has blasted oil through the $80 resistance leaving a gap those traders may want to try to fill. Still the momentum is with the bulls as long as we hold $80.
At some point the oil bulls may have their bubble burst by none other than Fed Chairman Ben Bernanke. The Fed Chairman said yesterday that the U.S. Federal Reserve must be open to raising interest rates to pop future asset bubbles, even though stronger regulation remains the best solution to prevent a repeat of the recent economic crisis. Ben Bernanke says that it was not low rates that caused the bubble in housing but lax regulations. Ben said that, "Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates."
But if the carry trade and oil is deemed too bubbly, will the Fed be willing to step in and pop that bubble? Fed policy has been a major factor in the run up in oil prices and if they are deemed to be bubbly by the Fed, then we better get ready to burst that bubble. Ben Bernanke says that the Fed's robust exit strategy is in place to remove stimulus. The same type of stimulus that helped create the oil move. Not only does the Fed plan to raise interest rates that they pay on reserves but other measures that the Fed has been testing that will drain reserves from the system. When that goes into effect it can have a big impact on the dollar. The dollar is also a factor in the oil trade.
The dollar was stronger after some positive comments by Ben Bernanke. Ben said that despite the recent weakness the U.S. dollar remains the world's dominant reserve currency and that's why it strengthens when economic conditions become more worrisome. He said that people still view the U.S. dollar as a safe haven currency and U.S. markets as being the deepest and most liquid markets in the world. Of course that means that when the stimulus is lifted it will be all the more reason to lift the carry trade and sell oil.
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 firstname.lastname@example.org.
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