Oil finds positive demand message in address

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Can President Obama find hope and happiness in a land of fiscal responsibility? Don't bet on it. Still it seems the markets are favorable, responding to Obama's baby steps towards addressing our nation's big budget problems. Obama gave stocks a boost and brought the runaway yield curve in by proposing corporate tax cuts and a freeze on government spending in his State of the Union address last night.

When the headlines started to leak, it seemed there were no defects to be found and a snapshot image froze without a sound. While some of the proposals will only have a minor impact on the deficit, the market feels that this is the starting point of the debate to change or current path off the proverbial financial cliff.

We saw the 30 year bonds rise and that was welcome as the treasury market has been signaling its concern with the perilous direction that we have been going. The widening yield curve against a backdrop of improving economic data has been a warning sign that our current debt trajectory is unsustainable. The market is concerned about the future of the U.S. stellar credit rating and that concern has been shared with rating agencies like Standard and Poor and Moody.

So, for at least one brief moment it seemed the President was at least trying to move away from his penchant to spend. Sure the debate has just begun but the market liked the fact that he touched on some of the sacred cows, especially when he called for "painful cuts" aimed at Medicare and Medicaid.

Yet critics say a five-year freeze on domestic discretionary spending does nothing to undo the record spending that Obama has already put through. It is quite obvious Obama's steps have not gone nearly far enough, but now that he has opened that door, negotiations will begin and hopefully there will be no looking back.

The oil market took that as a positive as it shrugged off recent lows. A fiscally responsible USA will improve our future demand prospects. We have seen the negative impact on demand from recent crisis situations and Europe, and the market feels that this should improve our future demand prospects. And demand is recovering globally at a historic pace.

Ok, we realize that they had a long way to go from the economic crisis but the rebound in demand is impressive nonetheless. In fact a surge in demand as ignited with QE2 created what Ernst & Young's Oil & Gas says was the second biggest demand spike in the past 30 years. In their quarterly report they say that the last quarter of 2010 was the largest demand spike since 2004 and the second greatest since 1980.

Now they do not expect that demand will be that explosive this year but want that governments need to take action and get prepared to avoid future demand spikes. At a time when global demand is recovering at a historic pace at least one refinery is pulling back.

Hovensa, a jointly owned refinery of Venezuela's PDVSA and Hess Corporation, is reducing its crude distillation capacity by 150,000 barrels a day. Distillation is the first step in the processing of crude oil and the reason they are doing it is what they say are tough economic times. Still refining margins are improving but this reduction in capacity is a worry for product prices.

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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