• Home ::
• Fundamental ::
• Analysis Reports ::
• The Energy Report

• Send
• Print
• Add To
• Rss

The Energy Report

5212337b-224b-4cd0-a470-4435681391c6

0

0

Identity Crisis

Fri, Sep 19 2008, 15:31 GMT
by Phil Flynn

Alaron

Another wild day in the energy complex and during the day I was explaining to J.W. Elphinstone of the Associated Press why oil had traded all over the place as it did.

Oil rallied like crazy in a flight to quality in commodities and then broke on fears that demand would be weak. Then we rallied when the market came back on the hopes that somehow Uncle Sam might save the day and make this crisis just go away. I was trying to explain how oil at times acts as a safe haven against systemic risk in the economy and against the dollar yet at the same time it might not be the best hedge in a slowing economy. Oil is subject to pullback on the fears of slowing demand growth. I said that early on there was a surge in panic buying that included oil but that oil can be the ugly stepsister in the flight to quality in commodities. After going over the shifting sentiment in the oil market and the trader’s motivation for moving the market, Ms. Elphinstone put it in clear terms that only a reporter can by saying what you are telling me is that oil is having an identity crisis. Bingo!

That is it! Oil is having identity crisis. Not just a small identity crisis but a huge identity crisis. In fact this could be the biggest identity crisis for a commodity since Razzles did not know whether it was a candy or a gum. Is oil a safe haven commodity in times of financial meltdown or is it just a false sense of security when the demand side of the equation comes tumbling down.

Let's take a look at the historic market action. The market had the equivalent of a sick stomach and racing pulse with a twinge of paranoia. It kind of felt like the world was coming to an end. We saw levels of unprecedented fears about a total meltdown of the entire economic system as judged by a record high reading on the VIX index and the record rally in gold on Wednesday and the follow through into Tuesday. The Financial Times said that the barometers of financial stress hit record peaks across the world. Yields on short term US treasuries hit the lowest level since the London Blitz in World War II.

And through it all oil was not sure if it should rally as a safe haven against the fallout of the crisis or tank because the demand for it as a commodity will be shaken if the economic world around falls apart. It seemed like the oil market was asking “who am I? What am I?” The oil was dragged up believing that it might be a safe haven but broke again when it decided that it was not so sure. Yet late in the day oil rallied back not because it was a safe haven but rallied as it thought that perhaps the economy will survive and there will be demand for oil after all. At the end of the day I am beginning to wonder if oil can live in the same apartment by itself.

And what was the signal for oil to rally late? Well oil rallied as stocks came back. Stocks rallied as short selling on financials became a thing of the past at least temporarily in London and perhaps the US and some alleged rumor mongering that short sellers may be prosecuted. Goldman Sachs and Morgan Stanly were complaining about the short sellers of their stock. Kind of like the CEO of overstock dot com used to but no one paid attention. And of course stocks rallied as word of another huge plan in play to try to put this crisis of confidence back to rest.

This leads us to another identity crisis which is the US economic system itself. Are we no longer the bastion of free market capitalism in the world? Is the US still a free market system? First the government bailed out Bear Stearns and the government nationalized AIG insurance and backed Fannie and Freddie. If that was not enough the Wall Street Journal says the Feds are now working on a sweeping series of programs that would represent perhaps the biggest intervention of the financial markets since the 1930s. The Journal says that, “at the center of the potential plan is a mechanism that would take bad assets off the balance sheets of financial companies, a device that echoes similar moves taken in past crises. The size of the entity could reach hundreds of billions of dollars. Another proposal would be the creation of federal insurance for investors in money-market t mutual funds, coverage akin to the insurance that currently safeguards bank deposits.” Marketwatch says that the Treasury has already set up a guaranty program for US money market funds.

We are joining Russia that today is announcing an expanded $120 billion dollar rescue for its economy and China is buying its own stock to stop its market slide. It looks like decoupling line has decoupled.

Of course the big question is will all of this work or will we have black Monday revisited. If the market holds up will oil demand rebound and save the beleaguered demand side of the equation? Based on the Dow rebound and because of technical reasons I think that the moves by the Fed will save the market and oil prices may benefit in the short term. But there will still be economic fallout from this global crisis that will reduce demand. Still oil old worries still exist. If the stock market does not have you depressed then how about a tropical depression. Reuters and the National Hurricane Center is reporting that an Eastern Caribbean Sea tropical wave is moving slowly across the Lesser Antilles and could strengthen into a tropical depression. An “oil war” is ongoing in Nigeria. AP says that a spokesman for Nigeria's state oil company said Wednesday that militant attacks are now cutting the country's daily oil production by about 1 million barrels a day, 40 percent of what the country produced before the militant campaign began three years ago. Iran is still thumbing its nose at the world regarding its nuclear program and Venezuela is taking over all the oil in the country and threatening to cut off the US from supply. So for oil without the financial crisis it is just another day at the office.

We're short November crude from apprx 10000 - stop 10200!

We're short November heating oil from apprx 29000 stopped at apprx 29300. Buy November heating oil at 27000 - stop 26700.

Sell November RBOB at 26500 - stop 27500.

Buy November natural gas at 740 - stop 720.

Have a GREAT day and weekend!

Published on  Fri, Sep 19 2008, 15:32 GMT