Positive earnings may signal oil demand

A penny saved is a penny earned but enough about copper let's talk aluminum. Alcoa set a good tone for the energy markets as they kicked off the earnings season with some better than expected numbers.

Yesterday oil prices fell back as the market awaited earnings from Alcoa yet it seems that they were worried about nothing. The Wall Street Journal said, “Alcoa swung to a profit in the second quarter on improved demand and prices after the aluminum producer struggled with anemic prices for the metal a year earlier. Although the price of aluminum has fallen about 12% in 2010, Alcoa offset that drop with a jump in volume, driving a 6% sequential increase to higher-than-expected revenue. It also said that better productivity, foreign-exchange benefits and lower energy costs contributed to the revenue climb. The top- and bottom-line growth was driven by higher volumes from stronger end markets and continued gains from our productivity programs," according to Chairman and Chief Executive Klaus Kleinfeld.” The good earnings results set a nice tone and oil responded as it will to the slew of other numbers ahead of us.

The market may also focus on the latest report from the International Energy Agency. The IEA, in their latest report, says they expect world oil demand in 2011 to grow by 1.3 million barrels per day. At the same time they expect the demand from China to slow. Spencer Swartz from Dow Jones writes that the IEA expects oil demand to slow next year in China and most other parts of the world, indicating that crude prices are likely to trade at subdued levels well into next year. Sounds like what we have been saying for awhile now. In its first assessment of 2011 global oil trends, the Paris-based agency forecast world oil demand to grow by 1.3 million barrels a day, or 1.6%. That increase rate is below the 2.1% rise in global crude consumption expected this year, although it is in line with 1.7% growth seen on average annually from 2000 to 2007. Despite a higher rate of global economic growth projected next year, the IEA said the dual impact of improving energy efficiency in industrialized nations and a gradual phasing out of economic stimulus in emerging markets like China — the fastest-growing oil consumer globally — would slow the pace of oil consumption. Very similar to what I said in my mid-year commodity update that you can contact me to get as well as what I said in the beginning of this year. It also said the Organization of Petroleum Exporting Countries would continue to have 5.5 million to 6 million barrels a day of back-up spare oil production capacity far into 2011 to offset any unexpected supply disruptions. A number some have disputed yet unless the economy soars, it will never be put to the test. Most of that ample capacity is held by Saudi Arabia, the world's biggest oil exporter. "Whisper it quietly, but we might, just might, be in for some market stability for a while longer," the IEA said.

Whisper it? Scream it from the roof tops! This is the International Energy Agency we’re talking about. They are usually very conservative about spare capacity as they represent the interests of the consuming nations. They want to keep producers producing and to keep prices low. For them to be talking this way is really astounding and really bearish. Yet these are the things we have been seeing and been saying all year. What is more it is the truth! The Wall Street Journal goes on to say that, “the agency, an energy advisor to mostly industrialized nations such as the U.S., said it expects oil prices next year to average $79.40 a barrel. The IEA's latest forecast highlights the more benign view of the global oil market compared with a year ago when many industry observers were warning that a sharp drop in oil exploration spending would hurt future supply and drive crude prices sharply higher by 2010-11. Capital expenditures did drop by almost 20% last year, but are expected to rebound by about 10% in 2010.

What has also changed is a more relaxed view on oil consumption. Consumers are still bent on maximizing energy efficiency in places like the U.S. and oil traders have lingering doubts about the health of Europe's and America's economic recovery and the knock-off effect in emerging markets. The IEA said it expects total Chinese oil demand to rise by just 4.8% next year to 9.56 million barrels a day compared with robust growth of 9.1% this year. China is the world's second biggest oil consumer at a distant second to the U.S., which is forecast to burn 18.86 million barrels a day on average in 2011, down slightly from this year. There are some potential problems ahead. Non-OPEC oil supply is forecast to grow by just 400,000 barrels a day in 2011, half the growth rate expected this year and far below recent historical averages, due to aging oil fields. The IEA also cautioned that regulatory and legal uncertainties in U.S. offshore oil drilling, stemming from the Gulf of Mexico oil spill, could cut U.S. oil output by up to 300,000 barrels a day by 2015.

Speaking of that, for the Obama administration, perhaps the third time will be the charm as Reuters News reported. The U.S. Interior Department will issue a new offshore drilling moratorium on Monday that will end Nov. 30 or sooner, said a government source familiar with the new drilling plan. The White House said the new drilling moratorium will come out later on Monday. Unlike the initial moratorium, which was blocked by a federal court, the new one has a specific end date. The moratorium could end sooner than Nov. 30 if Interior Secretary Ken Salazar determines that deepwater drilling can be carried out safely. Under the new moratorium, drilling in shallow waters would be allowed to continue as is the case now if oil companies meet new safety and environmental requirements and deepwater oil production would also be allowed to continue. The Interior Department will be "open to modifying" the new exploratory drilling suspensions if the oil industry can show it can operate safely in deep waters, the source said. Obviously this is an attempt by the Obama administration to save face in the bungled handling of the situation in the Gulf. With the courts throwing out two previous attempts by the government to stop drilling this third attempt has a lot of, ifs, ands, or buts and they hope it will pass the muster of the courts. Of course remember, it is three strikes and you are out.

There are also European worries still out there. It was reported that Moody’s downgraded Portugal from A1 to AA2. Then the good news was that the outlook for Portugal was stable.

Despite all the news and influence by the dollar, oil still seems to be in a trading range. Still I feel the best way to trade the market in the short term is to use options or to trade the ranges.

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

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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