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

• Send
• Print
• Add To
• Rss

The Energy Report

ef6706b6-e7ab-4ea2-8e1a-15e9f9644515

6

0

Change back from your dollar

Fri, Dec 5 2008, 15:51 GMT
by Phil Flynn

Alaron

Change back from your dollar. With RBOB futures closing below $100 a gallon is it possible that retail gas price may actually find their way below one dollar?

RBOB gasoline futures which hit a high of $3.63 in July have now closed at 98 cents a gallon. That is the first time since the NYMEX has traded the RBOB gasoline futures from 2006 that this wholesale price closed below a dollar. Now it is possible that we will see retail gas prices at some point follow suit. And it is not just me that's saying it's possible but also the CEO of Gulf oil Joe Petroski. Mr. Petroski said that he thought that crude prices could sink to $20.00 a barrel and gasoline prices as low as $1.00!!! According to the latest figures released from the Energy Information Agency retail gas prices stand at $1.81 per gallon which was down 8 cents from the previous week and down $1.25 from a year ago. So is it possible that gas prices could come down a another 80 cents per gallon? Well if it is going to happen it is going to have to start with crude oil.

Crude oil closed at the lowest level since 2005. US oil demand in the month of November saw its biggest drop in demand since 1981. This is a demand drop of historical proportions. The price of crude oil is set for its biggest weekly decline since March, 2003 which loyal readers of The Energy Report could have told you. Even if prices fall and gas demand increases, prices of gasoline will not spike like they have in the past. Slower global growth and the lack of easy money mean the conditions that led to oil incredible price spike will not likely be repeated again, at least not in the foreseeable future. In the past decade oil has been driven by strong global economic growth and also driven by cheap money and available credit. With credit being tight do not expect a sharp rebound. There are those that fear that these low prices will kill projects and hurt production. Today the Wall Street Journal says that oil companies have less incentive to invest as their margins get crushed. The Journal says that Schlumberger LTD, the world's largest oil-field-services firm by market capitalization, warned that its 2008 earnings will miss analysts' estimates as oil and gas production slows world-wide. They go on to say that industry drilling-rig counts have begun falling sharply. Using data from the research firm of Sanford C. Bernstein & Company, the Journal says that the oil industry's average break-even cost zone is at $35 to $40 a barrel, though the figure can vary by project and other factors. Thursday's closing price is well below the $70 to $75 marginal cost at which producers this year could earn an expected return of roughly 9% on new drilling projects.

This must read in the Journal says that North America is likely to see the sharpest retrenchment in oil based investment but says that Schlumberger's announcement suggests international projects could follow. Projects that revived long-dormant wells in Oklahoma, used new technologies to salvage old West Texas oil fields or extracted oil from tar sands in Canada require prices above current levels, in some cases far above, unless costs also fall. Some deepwater projects in the Gulf of Mexico or the North Sea would be imperiled if prices fell below $40 for an extended period. (Somewhere Nancy Pelosi is smiling right now).

Oil bulls believe this means that we will see oil spike right back up but the truth is that it will take years for oil prices to achieve that bullish frenzy that we have seen in the past. The truth is that the wild bull era is over. It was a thing of the past. We are now entering a new era of lower and more stable oil prices for years to come. That does not mean we will not see other bull markets along their way but get used to the markets trading different than they did throughout most of this decade.

The Journal also suggests that the bears are now coming out of the woodwork or at least the forest! Today’s Wall Street Journal said that “a growing number of industry insiders say conditions are now ripe to test the market's lows. The Journal says that, “it has historically taken OPEC many attempts to stem price declines” (if they can) and that “a sea of excess inventory is building from Cushing, Okla., to Singapore. Even in China, one of the few growing markets around the globe, stockpiles are rising.” It appears we are beginning to see the size of an oil glut. This is no surprise again to loyal Energy Report readers who have seen this coming!!!

Now just a weekend note! I am so happy that so many of you have emailed and called and I thank you. I think this week we got contacted by so many people requesting to get on my daily blast that it was almost unbelievable! My assistant should have got all of you set up, but if by chance you are not getting the report, please email again. Also in the coming weeks I will try to contact all of you either by email or phone personally.

We’re short January crude from apprx 5760 on a double rollover!!!!!!! Lower your stop to 5300!!!!!

Buy January heating oil at 14300 - stop 13900 or sell at January heating oil at 17700 - stop 18100.

Buy January RBOB at 9700 - stop 9500 or sell at 13000 - stop 13500, whatever comes first.

Stopped on long January natural gas from apprx 597 at apprx 588. Buy January natural gas at 510 - stop 470.

Have a GREAT day!

Published on  Fri, Dec 5 2008, 15:53 GMT