The Energy Report for Tuesday, December 30, 2008

• Print
• E-Mail

War fears, emotions and light, end of the year volume, drove what was left of trading in the energy complex. Energy rallied on the disturbing reports from Israel as its retaliation on Hamas continued. Israel, tired of rocket attacks launched by Hamas from the Gaza strip, led Defense Minister Ehud Barak to say that Israel is, "fighting a war to the bitter end" against Hamas. Hamas has responded by launching more missiles into Israel.

Yet despite the reaction to the violence in Israel, oil traders have to wonder whether these moves, created in part by this conflict, are sustainable over the long run. Indeed as energy tried to dismiss the violence and sell off, oil came back in a late day surge as reports that tanks and troops were amassing along the border. Fears that a ground assault was imminent and tough talk from the White House blaming Hamas for this latest round of violence was enough to create a late surge of flight to quality buying.

Yes, I do mean flight to quality buying. Oh sure, some may fear a disruption of supply due to a war in the Gaza strip but does anyone at this point really believe that the conflict will lead to a disruption to oil supply? The late surge in oil came along side the bond market and a wild session for the dollar. Yes, we know that Iran backs Hamas but can they really afford to get involved? Some say Israel responded now because they wanted to do it before George W. Bush left office. But could the low price of oil also be a factor. Did Israel want to strike while Iran and other Arab nations are struggling because of low oil prices? Did the economics of oil figure into the timing as well?

Remember when Russia cut off gas supplies to Europe and the Ukraine and it caused a massive rally in energy well. Well that was 2006 and this is now. Back then Vladimir Putin was flexing his energy muscles and sent a message to the Ukraine that 2004 Orange Revolution and the move towards democracy and Western ideals did not please him. Now it is because they need the cash. Oil seemed to shrug when Russia and Ukraine failed to reach an agreement on gas debts. That means we can see a cut-off of supplies to Europe in a couple of days.

Gazprom profits were up big but as the New York Times reports, Gazprom has seen better days. In Today's Times Andrew E. Kramer wrote that, "A year ago, Gazprom, Russian natural gas monopoly, aspired to be the largest corporation in the world. Buoyed by high oil prices and political backing from the Kremlin, it had already achieved third place judging by market capitalization, behind Exxon Mobil and General Electric. Today, Gazprom is deep in debt and negotiating a government bailout. Its market cap, the total value of all the company's shares, has fallen 76 percent since the beginning of the year. Instead of becoming the world's largest company, it has tumbled to 35th place. And while bailouts are increasingly common, none of Gazprom's big private sector competitors in the West is looking for one."

That Russia's largest state-run energy company needs a bailout so soon after oil hit record highs last summer is a telling postscript to a turbulent period. Once the emblem of the pride and the menace of a resurgent Russia, Gazprom has become a symbol of this oil state's rapid economic decline. During the boom times, Gazprom and the other Russian state energy company, Rosneft became vehicles for carrying out creeping re-nationalization. As oil prices rose, so did their stocks. But rather than investing sufficiently in drilling and exploration, Russia's president at the time, Vladimir Putin used them to pursue his agenda of regaining public control over the oil fields, and much of private industry beyond. As a result, by the time the downturn came, they entered the credit crisis deeply in debt and with a backlog of capital investment needs.

The Times goes on to say that, "Critics predicted Russia's policy of nationalization would foster inefficiency, or at the very least disruption as huge companies were bought and sold, divided up and repackaged as state property." A must read in the Times. The Energy Report of course long ago told us all that Russia's taking over of its oil industry was the beginning of the end for the industry. We warned that the nationalization of the industry and the government involvement was a great step backward and would lead to big problems and Russian production falling.

Now more than ever you need to be getting the Fox Business Network to stay tuned to the latest market moving news and to see me everyday! And call to open a trading account at 800-935-6487 or email me at pflynn@alaron.com.

We're short February crude on a triple rollover from apprx 4461 - stop 5100.

Sell February heating oil at 15000 - stop 15300.

Sell February RBOB at 107 - stop 111.

Buy February natural gas at 550 - stop 500.