Another sign that OPEC is defying its own nature by adhering to production cuts and another sign that the market somehow just does not care. Bloomberg News reported that PetroLogistics, the tanker tracking firm, says that OPEC is actually complying with the majority of their agreed upon production cuts. Using data from the firm Bloomberg says that the reduction means that OPEC, while still above its formal limit, has completed 89 percent of the 4.2 million barrels a day of supply cuts announced since September. In the past 10 days, Algeria, Iran, Venezuela and Iraq have said the group is prepared to take further action if needed at its meeting on March 15 in Vienna.
This is absolutely amazing and it shows how disciplined a cartel can be when its back is against the wall. The last time OPEC compliance was this good was probably in the early part of this decade when the cartel was trying to rebound from the post Jakarta price drop. Bloomberg says that oil supply from 11 members of OPEC will average 25.3 million barrels a day in February, down from 26.3 million barrels a day in January quoting Conrad Gerber, the founder of PetroLogistics. Members have a production quota of 24.845 million barrels a day. Iraq has no quota. “It’s a good reduction,” Gerber said, “If they keep to this level it’ll certainly make inroads into overall stocks.” And some believe that perhaps OPEC has already had some impact on supply. Bullish traders are hoping that last week’s surprise drawdown in the weekly inventory report was the sign that somehow OPEC was finally getting ahead of the falling demand curve.
The market wasn’t willing to bet on it. The continuing weight of the nation’s financial crisis is making it hard to be bullish. Obama speaks and the market sells off. Is this the "change" he was talking about? Conversation about slashing the deficit is normally a good thing but not after you announced the biggest spending bill in history. The stock market tanked as it became apparent that this slashing of the deficit would come in the form of higher taxes on struggling businesses. This in turn would hurt the recovery of the economy. The same way that OPEC is hurting the recovery of the economy. By cutting supply OPEC has been successful keeping oil out of the twenty dollar range but at the same time, it is assuring us that it will have a hard time staying solidly in the forties. OPEC has to remember that the game has changed. This is not 1999 anymore; this is 2009. This is a new era and one that does not and will not have the type of easy credit conditions that helped fuel the meteoric rise of oil over the last ten years. When the cycle is bullish you stay bullish. When the cycle changes and is bearish, you stay bearish. We need to see fundamental evidence that things have changed or solid reasons to believe that things will change. Early in this decade when I said growing demand from China would create a massive bull commodity run I was criticized for being overly optimistic. This year when I predicted that oil run was unsustainable because oil was running up for the wrong reason I was told that I was crazy. When I dared question the sustainability of Chinese demand growth and the eventual pop in the China demand bubble, I was called naive. Now it is obvious to everyone, except perhaps OPEC and Obama, that there has been a fundamental change in the factors that drove oil. It is price versus reality. It is perception versus price. Do not be fooled into believing you know what a fair price for oil should be. It changes! If you don’t believe me watch the market trade. Every time it trades we have a buyer and a seller we are establishing what a fair price is. This may be a new world but markets are old world. It will take time and cheap oil prices to get back to a growth oil demand world. Oil will bottom but the longer OPEC keeps supporting the market the longer the process is going to take.
Yet they seemed determined to cut production again. Why don't they get it? The Wall Street Journal says, “Falling oil prices are putting pressure on the Organization of Petroleum Exporting Countries to cut production next month. Once teeming with petrodollars from the oil boom that started in 2002 and fizzled last year, a number of OPEC members, including Angola, Ecuador, Iran and Kuwait will reduce government spending this year to compensate for shrinking oil income. Nigeria narrowly avoided cutting its 2009 budget, but its president, Umaru Yar'Adua, told government workers they'll see smaller pay checks this year.” The Journal goes on o say, “Venezuela hasn't paid hundreds of millions of dollars to a number of foreign oil-service companies, causing some firms, including Oklahoma-based Helmerich & Payne to halt some operations. With no work to be done in certain locations, state-run Petroleos de Venezuela SA has been forced to lay off an untold number of its oil workers.” The Journal says that OPEC may pledge another production cut of as much 1 million barrels a day when it meets March 15 in Vienna.
Heating oil has been getting hit hard as well. It is partly because spring is coming and partly the old bad news/good news scenario. Finally truckers are getting a break at the pump yet the problem is demand for their services is falling. Retail diesel prices fell 5.6 cents to $2.13 the lowest level since February of 2005. Factory closings and China demand has been a factor even though it appears China may be doing some buying for its reserve.
And as I predicted to all of you who were complaining that gas prices were going up while oil was falling that gas prices would come back down. Dow Jones Newswires reported that the national average retail price of regular gasoline fell 5.5 cents to $1.909 gallon in the week ended Monday quoting the Energy Information Administration. The 2.8% drop in the week was the biggest since Dec. 8. Prices are now $1.221 gallon, or 39% below a year ago. That's the biggest gap since January 12. The decline follows gains of 13 cents a gallon over the previous three weeks. I expect further drops in the coming weeks and expect a counter seasonal move for RBOB gasoline. I expect that RBOB will defy historical trends and move lower when they should be moving higher! Beware seasonal traders! Warning! Warning!
Bloomberg News Is Reporting that oil traders may accelerate a move to London-based Brent contracts because volatility in prices of New York’s West Texas Intermediate grade has made it an unreliable benchmark. tCharts show according to Bloomberg that in the past year aggregate open interest has declined 14 percent in the New York Mercantile Exchange’s WTI futures and increased 14 percent for Brent, traded on the ICE Futures Europe exchange. New York oil futures have traded at a discount to Brent since December, widening to a record $10.67 a barrel in February, because of growing inventories at Cushing, Oklahoma, where WTI is delivered. WTI, a so-called sweet, light grade that yields a high proportion of gasoline, typically trades at a premium to Brent and other heavier crudes.
Sell April crude oil at 4100 - stop 4360.
We're short March heating oil from apprx 14000 - lower stop to 13300!
Sell April RBOB at 12700 - stop 13300.
Sell April natural gas at 500 - stop 540.
