The Energy Report for Wednesday, February 10, 2010

Grecian Formula: It's as easy and one two three, just add the cash and the debt just gradually fades away. Is there a Grecian formula to step in and bailout Greece? The market sure thought so as about 16 different headlines and stories seemed to suggest that some type of Greece bailout was imminent. As the stories flew so too did the euro, having its biggest rally against the dollar in five months, helping to drive up commodities across the board including oil. Still the question about whether or not Greece will get bailed out and who is going to do the bailing remains an open question.
The market moved on a Reuters report that there was an agreement in principle to provide aid to Greece. Reuters reported that a senior German ruling coalition source said, The decision on help for Greece has been taken in principle within the euro zone, said the source who according to the news agency has knowledge of the negotiations on Greece, adding that the most likely possibility would be bilateral help. How and if this bilateral help comes in is critical and poses that old moral hazard for other countries in the euro Zone. If Greece gets a bailout then the rest of the PIIG (Portugal, Italy, Ireland, and Spain) countries may want one too. And that may be the very reason that this Grecian rescue package may not be as cut and dried as the market seemed to want to think.
The Wall Street Journal says that EU officials here are quick to scoff at talk of a bailout for crisis-racked Greece insisting Athens needs to get its fiscal house in order. The Journal also says that even if aid is given to Greece it wouldn't be straightforward, since the European Central Bank and national central banks can't bail out countries, according to the EU's governing treaty. But several EU diplomats and experts say there are no such strictures on individual governments. Euro-zone countries can't be forced to accept liability for their brethren's borrowing, but there is nothing to keep them from voluntarily helping others. If Greece gets bailed out that may give the buyers of the Euro short term comfort but longer term, this precedent that may be set may give the implication that individual counties debt has the implied backing from the rest of the EU. This of course will be a problem for the Euro as confidence in their currency may be influenced by the budgets of all of these individual countries. This is the same kind of mess we got into by the US with government sponsored entities like Fannie and Freddie that were not supposed to be guaranteed by the government but because of pressure from China, ultimately were backed by the government whether we said so or not.
Of course oil also got help by the surging heating oil market that was being inspired by the snow storms that some people are calling snowpocalypse. Dave Tolleris of Weather Risk says that these snow storms are no surprise to him as we always have big snow storms during the times of a weakening El Nino. Still, cold weather and snow storms inspired a run on heating oil. Bloomberg News reported that heating oil for March delivery gained 5.18 cents, or 2.7 percent, to settle at $1.9373 a gallon on the New York Mercantile Exchange. The rally caused in part on reports that heating oil demand is running about 17% above average during this storm. The heating oil crack spread, or the difference between the fuel and crude oil, based on March contracts, widened about 32 cents to $7.62 a barrel. Still with distillate supplies as of the last DOE report showing that distillate supply 15.9% above the five year average, this should be a short term blip and prices should retreat.
And that is all we have to go on because the EIA report is being delayed by the snow storm until Friday! But no need to fear the API is here. Unlike the guys in Washington that act like they have never seen snow before, the American Petroleum Institute have adopted the creed that  neither snow, nor rain, nor heat, nor gloom of night, nor the winds of change, nor a nation challenged, will stay us from the swift completion of our appointed weekly report! Unless of course there is a holiday involved. The API reported that crude supplies increased by a shocking 7.2 million barrels. That number might have been enough to knock out some of the bullishness out of this market if it were not for the fact that crude supplies actually fell by 1.9 million barrels in Cushing, Oklahoma. Crude runs still seem to be way off as runs fell by 309000 barrels per day indicating still very weak demand. Distillate stocks did fall because it was freaking cold outside and because runs were low. If the market gets its mind off of Greece this report should be put in the slightly bearish camp. Gas demand weak as people are snowbound! If you are snowbound make sure you keep up with the latest news by seeing me every day on the Fox Business Network. Also call for your specific trade recommendations at 800-935-6487 or email me at pflynn@pfgbest.com to open your account.

Phil Flynn
Senior Market Analyst