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How Bearish Can You Get?

Thu, Jan 15 2009, 17:12 GMT
by Phil Flynn

Alaron

Satin on my shoulder and a smile on my lips: How bearish can you get? Money in my pocket right at my fingertips; How bearish can you get? Every report a party where the fun never ends .You can circle the globe with a circle of oil. One report is crazy as crazy as it gets. Gee Wee Wow! How bearish, how bearish can you get? Get your jaw off of the floor. It might freeze.

Yesterday’s huge 6.4 million barrel build in distillates was actually jaw dropping. I was shocked! I mean holy smokes it's winter for heaven sakes. We should not be getting these kinds of builds in the middle of winter. Wait, we interrupt The Energy Report for some late breaking Bernie Madoff news. Bernie Madoff just blew his nose! Ok, that is the latest now back to The Energy Report. The EIA reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased 1.2 million barrels from the previous week which was less than the market expected. But forget about expectations when you consider that wildly huge build in distillates and where current crude inventories stand. The EIA reported that crude inventories stand at 326.6 million barrels which is way above the average range for this time of year. Not only that, when you compare that to the current demand and forward demand cover that is the largest forward demand cover we've had for oil since 1999; a time when oil was fighting to stay in the teens. David Bird at Dow Jones reports that total US company held oil inventories are sufficient to cover 55 days of current weak oil demand. Oil demand has seen the biggest demand drop since the aftermath of the Sep 11, 2001. David says that oil demand fell 6%, or nearly 1.2 million barrels a day, to 18.64 million barrels a day, the lowest level for this week since 2000. Inventories now cover 55 days of demand, up 7.6 days from a year ago, and 6.5 days above the 5-year average. The EIA even reported that gasoline inventories increased by 2.1 million barrels last week and they too are now above the average range. Weak demand with almost overwhelming supply. Gee, wow double wow, how bearish can you get?

No really, how bearish can you get? Can oil go to $25? Can it go to $20? They say a market always looks worst at its bottom and crude still has to prove it can take out $35. And with options expiration, we could not quite do it. Well not yet anyway. We have the ongoing dispute between Russia and the Ukraine, which is helping support Brent crude and talk from Saudi Arabia about further production cuts and comments from the Saudi King Abdullah that they were going to call an Arab league meeting to discuss the Israeli aggression, it is hard to write a more bearish script. Oil rallied on the kings comments but most likely they were brought on by pressure from other Arab nations like Iran. Dow Jones reports that Iranian President Mahmoud Ahmadinejad accused some Arab and Islamic states of complicity in "genocide" being carried out against Palestinians in Gaza. (I wonder who he means.) "Unfortunately, some states in the Arab and Islamic region tolerate or support this rare genocide with silence or a smile of satisfaction," Ahmadinejad said in a letter to Saudi King Abdullah, referring to the Israeli operation in Gaza. "Your Excellency, the king of Saudi Arabia and the custodian of the two holy mosques...it is expected from you to break the silence over this obvious atrocity and killing of your own children.” Tension between Iran and the Saudi’s is nothing new and there is no doubt the Saudis do not like the Iranian backed Hamas or their terror tactics. At the same time, the mounting death toll in the Gaza strip is increasing the pressure on the Saudi’s to try to use its influence to stop the bloodshed.

Yet with the coldest temperatures in a decade and overwhelming inventories oil and natural gas and products are going to have a hard time sustaining a rally. Yes, we have to respect the charts and the strong support at $35.00 and the fact that the February crude is a lame duck contract. Yet other than perception of perhaps a rebound in demand or the belief that even weak demand can support $35.00 a barrel can we make a strong case that $35 will hold? That belief will get harder and harder if we get a cease fire in the Gaza strip, if the gas ever starts flowing through the Ukraine or if ever - please lord! - that it ever warms up.

Now if you are cold right now, how about a heartwarming story to warm you up? How about the story of the little dictator that could and tried to use oil to fund his socialist revolution and forced the big, evil oil companies out of his country and now has his tail between his legs begging for them to come back. Simon Romero writes in the International Herald Tribune that good old President and total whack job, Hugo Chavez, has reopened Venezuela’s oil industry to bids from the west as oil prices have plunged. Romero writes that President Hugo Chavez, buffeted by falling oil prices that threaten to damage his efforts to establish a Socialist-inspired state, is quietly courting Western oil companies once again. Until recently, Chavez had pushed foreign oil companies here into a corner by nationalizing their oil fields, raiding their offices with tax authorities and imposing a series of royalty increases. But faced with the plunge in prices and a decline in domestic production, senior officials here have begun soliciting bids from some of the largest Western oil companies in recent weeks — including Chevron, Royal Dutch/Shell and Total of France — promising them access to some of the world's largest petroleum reserves, according to energy executives and industry consultants here. Their willingness to even consider investing in Venezuela reflects the scarcity of projects open to foreign companies in other top oil nations, particularly in the Middle East.

But the shift also shows how the global financial crisis is hampering Chavez’s ideological agenda and demanding his pragmatic side. At stake are no less than Venezuela's economic stability and the sustainability of his rule. With oil prices so low, the longstanding problems plaguing Petróleos de Venezuela, the national oil company that helps keep the country afloat, have become much harder to ignore. Embracing the Western companies may be the only way to shore up Petróleos de Venezuela and the raft of social welfare programs, like health care and higher education for the poor that have been made possible by oil proceeds and have helped bolster his popular support. A must read. Remember all you young dictators out there. If you build your house on oil you may drown in it.

We're short February crude on the triple rollover apprx 4461 - lower stop 4700! If not stopped, roll to March for a quadruple rollover!!! We have stayed short for the fourth roll! Rock and Roll!

We're long February heating oil from apprx 14900 - raise stop to 14920.

Stopped on short February RBOB from apprx at 12000 at apprx 11400!!! Sell February RBOB at 12300 - stop 12500.

We're long February natural gas from apprx 520 - stop 490.

Have a GREAT day!

Published on  Thu, Jan 15 2009, 17:14 GMT