Happy energy bulls may face reality

And The Profits Kept Rolling In

And the profits kept rolling in from every side. The S&P and the oil reached out and went real high. Now you may feel it should have been a supply/demand cause, but that's not the point my friends. When the profits keep rolling in, you don't ask how. Think of all the bulls guaranteed a good time now. When the profits keeps rolling out you don't keep books, you can tell you've done well by the happy grateful looks. Supply and demand only slow things down, figures get in the way, dam the statistics and enjoy because oil is on the way.

Well at least until we sober up. I think it is fair to say that no one will argue that the oil market, along with a lot of the commodity markets, are again dazzled with the prospect of renewed economic growth. Oil started its incredible run after Alcoa set the tone and even spiked after Intel saw its sale surge a whopping 34% from a year ago and much higher than expectations. Who knew that computers ran on oil? Why even bother talking about the bearish American Petroleum Institute supply and demand report or even the bearish MasterCard Spending Pulse survey when the market is so focused on stock profits and economic euphoria. Well we do because at the first sign of stock market weakness we want to gage how far oil might fall.

Let’s start with the MasterCard SpendingPulse report that measures gas demand based on credit card sales at the pump where we saw a major drop in the post 4th of July holiday let down. The survey showed a drop of 4.4% dropping gasoline demand to a five-week low. They also reported that gasoline prices fell 7¢ a gallon in a sign retailers were dropping prices in a desperate effort to attract drivers to the pump. This is not normally the type of demand numbers that get our bullish juices flowing.

As for that matter neither are the numbers from the American Petroleum Institute. The API reported builds across the board as opposed to the expectations of most analysts. I did call for increases for the API and today’s Energy Information Agency report predicting that crude would be up by 3.5 million barrels, gasoline down 1 million barrels and distillates up by 1.5 million barrels. Well the API version says that crude stocks increased by 1.7 million barrels, gasoline up by 1.7 million barrels most likely reflecting the drop in demand that we saw in the MasterCard Spending Pulse report and distillates rose by 3.2 million barrels. So the report is bearish based on expectations and if the Energy Information Agency confirms the increase in supply perhaps oil will think twice before it continues this corporate profit buying binge.

In fact it may be this sobering data that is keeping oil restrained in overnight trading. We know that oil is being swept up in the stock market mania yet the weak short term fundamentals means that we are vulnerable to a big correction. We also have to remember that many traders are switching over to the September futures contract. Another factor that helped oil was a rebounding euro. The euro gained ground on a successful Greek debt sale. Also helping the euro is the recent break in energy prices helped along by recent euro weakness. Dow Jones reported that euro zone inflation slowed in June due to weaker energy price gains, indicating the European Central Bank has ample room to keep interest rates at record low levels for some time, official data showed Wednesday. The euro zone's annual inflation rate eased to 1.4% in June from 1.6% in May, the European Union's Eurostat statistics agency said. On a monthly basis, consumer prices were unchanged in June after rising 0.1% in May.

While the weaker euro helped Europe achieve lower energy prices a stronger yuan may be not be hurting China on the energy demand front but not on the energy company profit side. Dow Jones reports that, “with oil priced in dollars and China's appetite for foreign crude showing few signs of slowing down, you would think that China's three largest-listed oil companies would benefit from a stronger yuan. If so, you'd be wrong. Petro China Co. (PTR), China Petroleum & Chemical Corp. (SNP) and Cnooc Ltd. (CEO) will likely see their production costs rise as a result of Beijing's move toward greater exchange-rate flexibility as those costs are priced in yuan, analysts say. The oil giants can also expect domestic retail fuel prices to drop, and exports of petrochemical products to suffer, the analysts add. Last month, China's central bank said it would allow the yuan’s exchange rate to become more flexible after holding it steady against the U.S. dollar since July 2008. The two-year peg was put in place as an emergency measure to help stabilize the Chinese economy during the global financial and economic crisis. Even though government officials insist the reform doesn't necessarily mean the yuan will appreciate against the dollar, the Chinese currency has raised around 0.8% in value to 6.7718 vs. the dollar since the bank made its move. Some economists expect the yuan to appreciate 3%-5% by the end of this year. China Petroleum & Chemical Corp., or Sinopec, was seen as a major beneficiary of a stronger yuan as China's top refiner sources 70% of its crude oil overseas. China's crude oil imports hit 117.97 million tons during the first half of this year, up 30.2% from the first six months of 2009.

At the same time it was reported that China revised up its first-quarter 2009 gross domestic product growth figure to 6.5% from the original 6.2% growth from the previous year. The revision comes after the bureau revised China's 2009 GDP growth to 9.1% from 8.7% earlier this month.

Well things have not been good for BP but at least they are not bankrupt. But the same cannot be said for the Nigerian State owned Oil Company. Nigeria’s sitting on some massive amounts of some of the best quality crude in the world. Yet the sad truth is this potential life changing bounty has been squandered with greed and corruption. Now according to junior Finance Minister Remi Babalola, debts owed are running into hundreds of billions of naira. This is a very sad story.

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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