Oil and gas up as global supply tightens

Paying the Price for an Economic Recovery.
While the Fed tries to sell us the virtues of inflation, the poor consumers at the pump are getting soaked. As oil prices rise and French strikers strike, we see the national average retail gas price start to surge as the price increased to $2.834 a gallon, which is the highest price since May 17. Retail Prices have surged close to 14 cents a gallon in three weeks which just happens to coincide with the price increase that we have seen in crude since the Sept. 21 Fed meeting. Since the Fed sent the signal that the printing presses were about to roll we have seen crude add over 11 dollars a barrel from peak to valley, a move that has had an immediate impact on the price of oil at the pump. Gas prices are 26 cents, or 10%, above a year ago while demand for gas hit the lowest level in almost 8 months. Demand for gas is running about 4.8 percent below last year while gasoline stocks are 4.3 percent above a year ago.

The threat of quantitative easing, while giving the stock market a lift, is giving consumers the squeeze. A fine price to pay to save the economy. Others are not so sure and believe that the move has less to do with the threat of QE 2 but a sudden tightening of global supply. Today's Wall Street Journal writes that the price of oil is rallying in spite of a glut of US supply because supplies are tightening globally. They point out that global supply dropped by 31.7 million barrels in the month of September. They also point out that US total petroleum supply fell to 1.13 fell from a peak of 1.44 billion barrels, a decline that is not "normal" for this time of year because of cuts in refinery runs and imports. Which is true but you have to remember we are cutting runs because demand is bad. Our imports are down because our exports are up not to mention the fact that we had more than one pipeline issue that played a part in declining supply.

Seeing that this is a transitory issue, we should see the supply compensate for that in the future. The continuing strike in France could keep supplies under pressure in the short run. The French strike could decrease our imports and increase our exports and help to cut down our massive oversupply. Reuter's News reports that European gasoline crack held just below a six-month high on Monday as strikes in France continued to paralyze oil supplies in the country. Nationwide, strikes over pension reforms have spread to the country's 12 oil refineries over the past seven days, adding to the impact of a three-week-long strike at France's largest oil port, Fos-Lavera, over working conditions and a port reform.

The main reason why supplies are tight is demand in China but news out of China may reduce demand expectations. Dow Jones reports that China's central bank said Tuesday it will raise its benchmark deposit and lending rates by 0.25% for the first time since the last hike in December 2007. The latest move represents the strongest effort yet by Beijing to withdraw its monetary policy stimulus introduced during the global financial crisis and comes amid rising inflationary pressures. The PBOC said in a statement it will raise the one-year yuan lending rate to 5.56% from 5.31%, and the one-year yuan deposit rate to 2.5% from 2.25%. From September to December 2008, the People's Bank of China had slashed benchmark lending rates several times as part of the government's efforts to prevent a sharp economic downturn during the global crisis.

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.


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