Fed and OPEC make a good team

Do you remember when OPEC used to matter? It seemed like the greedy cartel held the fate of the global economy right square in their hand. Press people would stalk different oil ministers desperately trying to get a comment or a clue to whether or not they would dispense their favor on the world and pump more oil or cut production and thumb their nose at the world. These oil ministers loved the attention. For a couple of weeks a year they were like rock stars with paparazzi following them around. Not bad for an evil cabal of market conspirators. Yet now, even though some press is attending the OPEC meeting, the guys are not getting the attention that they are used to. It is kind of like a celebrity on the decline that is quickly becoming yesterday’s news. There is no OPEC drama.

OPEC is living the economic dream. They are one of the biggest beneficiaries of the global economic crisis. OPEC is going to leave their production quotas unchanged and will continue to cheat on production as the opportunities arise. Why change things now when times are so good? Heck why constrain production when you have the global central banks around the globe doing your heavy lifting for you? OPEC should get on their knees everyday and thank their lucky stars for a guy like Federal Reserve Chairman Ben Bernanke who is turning out to be OPEC’s best friend.

Why Ben Bernanke? I will tell you why. Do you think the backstabbers in the OPEC cartel could have manufactured an oil rally like this in a slowing economy all by itself? Never! Fed Chairman Bernanke has had more impact of global oil prices than OPEC has had in a decade. Try to control price by restraining supply may be one thing but the Federal Reserve defines price or value. The Fed, by devaluing the paper and confidence backed greenback, instantly increased the value of oil. If the global economy implodes, at some point oil will still have value where paper money might not be worth the paper it is printed on. I bring up this point so the many traders that I talk to can get a handle on the dynamics of this explosive oil and broad based commodity rally. When it comes to oil there have been other bullish stories that have helped support prices but the historic nature of these incredible moves is based on the historic actions of the Federal Reserve.

What does give me comfort is that people are starting to get it. I do not hear the whining about the speculators driving the prices. People are starting to understand how oil and other commodities act in times of economic and currency crisis. I remember telling people, as oil soared in the beginning of the crisis, that it was not speculators driving prices but the fundamentals of the market driving money into oil. People ran to oil as they feared U.S. bank failures. They ran to the euro as they thought that Europe would be spared from the fall-out of our sub prime crisis. When I warned of coming demand destruction based oil price crash, people looked at me like I was from outer space. We heard from the people that believed it was speculators driving prices and that fundamentals did not matter. It is obvious that those people had to narrow a definition of what oil fundamentals are. They failed to grasp that the price of oil was reflecting the global economic turmoil of one of the greatest economic crisis in history. They had too narrow of a view and a lack of knowledge of commodity history so they jumped to a conclusion that was obviously wrong.

Even after quantitative easing, many still failed to realize how that policy and not strong demand was what was supporting prices. Now with oil surging since the Fed signaling QE2 and other commodities soaring, no one is making that mistake. They now understand the Fed’s quantitative easing and commodity price inflation dynamic.

We did have some bullish news to help things along. We had the International Energy Agency project global oil demand up 300,000 barrels per day this year to 86.9 million barrels per day and by the same amount next year to 88.2 million barrels per day, giving annual gains of 2.5% and 1.4%. The new IEA forecasts take into account updated and upgraded global growth forecasts by the International Monetary Fund, which sees the economy expanding this year at “an impressive 4.7%” and next year at 4.2%. The IEA put OECD oil demand this year at 45.8 million barrels a rise of 320,000 bpd or 0.7 percent from 2009. But in 2011 they say OECD demand “is expected to resume its gentle structural decline,” falling 290,000 barrels or 0.6%. China imported a record 5.67 million barrels of crude oil in September, its highest ever monthly total ever and a year over year increase of 35%.

Then we had the Energy Information Administration give their Winter Fuels Outlook. The EIA projects average household expenditures for space-heating fuels will total $986 this winter (October 1 to March 31), an increase of $24, or 2.5%, from last winter. EIA projects higher expenditures in all fuels except electricity, where expenditures decline by 2%. This forecast reflects moderately higher prices for all the fuels, although slightly milder weather than last winter for much of the nation should contribute to lower consumption in many areas. The EIA also says that according to the National Oceanic and Atmospheric Administration most recent projection of heating degree-days, the lower-48 states are forecast to be 3% warmer during the October through March winter heating season compared with last winter and 1% warmer than the 30-year average (1971-2000). However, heating degree-day projections vary widely between regions. For example, the Northeast, the principal market for heating oil, is projected to be about 5% colder than last winter, while the South is projected to be about 15% warmer.

EIA expects the price of West Texas Intermediate (WTI) crude oil to average about $80 per barrel this winter, a $2.50-per-barrel increase over last winter. The forecast for average WTI prices rises gradually to $85 per barrel by the fourth quarter of 2011 as U.S. and global economic conditions improve. EIA's forecast assumes U.S. gross domestic product (GDP) grows by 2.6% in 2010 and 2.1% in 2011, while world oil-consumption-weighted GDP grows by 3.8% and 3.3%, respectively, in 2010 and 2011.

Projected natural gas inventories reach more than 3.7 trillion cubic feet (Tcf) at the end of this year's injection season (October 31). This projected volume will be about 3% lower than last year's record-setting level but will still represent the second highest underground storage level on record for the month of October. The projected Henry Hub annual average spot price increases from $3.95 per million Btu (MMBtu) in 2009 to $4.47 in 2010 and $4.58 in 2011.

The API was also bullish showing a larger than expected draw in crude stocks falling 4 million barrel. For gas we had a surprise fall of 1.9M barrels and distillates drops of 250,000. The EIA report today is going to be released at 10 am central time. Crude stocks are expected to rise 1.2 million barrels, gasoline stocks seen falling 1.4M barrels and distillates seen falling 1.5M barrels. The natural gas report will be released at its regular time. Expectation is for an 80 Bcf increase! I think it will much less than that. Even closer to the average of 64 bcf perhaps 66.

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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