The Energy Report for Thursday, March 13, 2008
Who needs Nancy Drew when the mystery of the missing crude was solved by me last week? Last week the surprise draw in crude oil that was caused by fog in the Gulf of Mexico was rediscovered as the Department of Energy gave us two weeks of crude oil builds for the price of one.
Remember last week when everybody was shocked when oil supplies failed to build for eight weeks in a row? But now with yesterday's 6 million plus build it means that in reality the strong trend of rising crude supplies in the US really should not have been broken.
Yet of course with the dollar falling once again does supply at this point really matter? The Federal Reserve attempted to shore up liquidity by allowing primary lenders to borrow over 200 billion dollars in treasury securities for 28 days and accept triple-A rated mortgage backed securities in return was only enough to rebound the dollar for a day. Yet on day 2 it wasn€™t enough to stop the oil from hitting my sell target resistance point at 11020. The one day spectacular dollar rebound did not last so the funds continued buying oil as a hedge against the beleaguered dollar.
But how long can the price of oil defy the evidence that supplies are rising? The Financial Times writes, Goldman Sachs has been prominent among the bulls but yesterday the US investment bank advised clients to sell (that€™s right sell) the May 2008 WTI contract and to buy the NYMEX 2010 that traded as high as $99.45 a barrel yesterday, up $223 on the day. The FT quotes a Goldman analyst, Giovanni Serio, as warning that inventories are likely to increase in the next few months as weaker economic conditions and higher prices have weighed on demand. (Where have we heard that before?) Mr. Serio said that, Rising inventories against the weak economic backdrop could trigger a sharp liquidation in speculators positions.
What they are saying is something I have been saying and that is that most of the rally in oil of late is not about supply and demand but really about the larger economic condition. Oil is being use as a hedge against the dollar, no more and no less. And at some point, oil will disconnect as rising supply and slowing demand start to fall. Oil is in a bubble. A Fed inspired bubble as the Fed looks to exchange one bubble for another bubble. Of course bubbles, by their very nature always pop, so the big money question of course is when will crude oil pop?
And so we have to ask, when will the dollar stabilize.
The International Energy Agency may try to play bubble popper next Monday at a meeting of energy experts in Paris. Unless the IEA intervenes by buying dollars, don€™t look for them to have much of an effect.
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We're short April crude oil from apprx 11020 - stop 11120.
We're short April RBOB from apprx 27400 - lower stop 27500.
We're short April heating oil from apprx 30200 - stop 30500.
Buy April natural gas at 960 - stop 950.
Have a GREAT day!