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The Energy Report

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Oil and the new world economic order

Thu, Oct 9 2008, 16:02 GMT
by Phil Flynn

Alaron

Oil and the new world economic order: Can a unified effort from the world’s central banks save the world’s economic system from going into total collapse? Well at least they saved oil from a total collasp and that may signal at least there is a chance that we can avoid a worldwide depression. Oil prices at one time was the beneficiary of the credit crisis but is is now just another of its many victims. Oil prices were hitting new lows for the year and looked poised to move lower until the historic unified global interest rate reduction. That initially brought the stocks back up but at the same time it reminded the market what dangerous times we are in and at the end of the day the stocks faded away. Still the message that was sent the world’s central banks wild co whatever it takes to avoid a catastrophe gave oil bulls some hope that they could try to mount a little rally .

Of course that was harder after the DOE released their weekly inventory report that had bearish written all over it. Anyone who doubts that this credit crisis will have a negative effect on energy demand just needs to take a look at this week’s report. According to the DOE gasoline demand is down 5.3 percent just one year ago. Demand for distillates is down by 8.3 percent from a year ago from the same period last year. Jet fuel demand is 5.5 percent lower. Oh sure some of this was due to Hurricane Ike and the surge of buying before the storm but anyone following the trends knows that these numbers are well below what you might expect in a vibrant economy.

The weak demand and a surge of post Ike imports into the Gulf Coast led to a surge in supply as the DOE reported that U.S. commercial crude oil inventories rose 8.1 million barrels from the previous week. That puts crude supply total supply well above average for this time of year. Even beleaguered gasoline stocks soared by 7.2 million barrels and even though they are coming off the lowest level since the 1960’s it seem clear that refiners have the spare capacity to ramp up production at a moment’s notice if they could only find the desire. With gas cracks breaking the refiners’ backs there is not a lot of incentive to build up supply so gas supplies though they should improve in the coming weeks, Supply will stay low until gas demand starts to bounce back and we see some improvement in the crack.

Of course that might not come until we see some stabilization in the world’s equities markets. Oil from this point forward is going to be a story of demand expectations. Those expectations will rise and fall with the market. If the stock market crashes the oil will as well. If the stocks mount rally then oil should find some support. Yet oil will be as uncertain as the market.

This month in Futures Magazine I wrote a brief piece about the oil VIX and how that record high in the oil “fear and anxiety index” seemed to coincide with the top that we saw in oil. Now with the Old fashion stock market VIX hitting a record high could that signal that we are near a bottom on the stocks. I posed the question the Brian Cooley Veteran S+P floor trader whose floor badge is “COOL” and he had an interesting theory. Seeing that oil was propped up in the first round of this credit crisis by the false assumption that the credit crisis would be contained to the US and the world’s stock markets had not enough concern about the economic problems that would soon confront them the VIX index many times was way too low and the market place generally to complacent.. By the same token remember oil was way too high. Now with the VIX hitting all time highs in the high fifties and oil perhaps headed that way he feels a cross in the price of oil and the VIX would signal the real risks of slowing are priced in and that would be the bottom. As crazy as that sounds it sounds like a valid theory. Some may think it is like seems like your comparing apples and oranges. Or apples and squash or whatever but in another way it makes a lot of sense. If the VIX soars to 60 and oil falls into the fifties that would seem to be very extreme. In the past the VIX has had amazing predictive powers and this theory is worth watching.

Short November crude from apprx 10800 lower stop to 9500!!!!

Sell November Heating oil 28500 stop 29000

Short November RBOB apprx 26500 stop to 23000!!!!!

Bought November Natural gas apprx 670 stop 640

Published on  Thu, Oct 9 2008, 16:04 GMT