Bulls last shot! Oil's failure to stay above $50.00 a barrel may prove fatal to the bull's hopes that oil can put in a sustained run. Yesterday's reversal was a weak technical signal from a market that seemed to benefit from new geopolitical worries yet still has the backdrop of negative economic news. The bulls are going to need to get a lot of help from today's inventory report or the early bullish mood of 2009 may have already ended. Those that are still locked in their fair price fallacy have to remember that historically recessions and a weak global economy has never been good for energy prices. Remember it was not too long ago many of you thought oil at $40.00 or $50.00 a barrel was ridiculously high and that was in a global economic expansion. Now in the face of a historic economic slowdown some of you now think that $40.00 or $50.00 a barrel is cheap. The FOMC report does not bode well for future energy demand. Talk of high unemployment, negative GDP growth along with substantial risks to the economy. Weak factory orders also are bad sign for future energy demand.
The most bullish part of the FOMC minutes were the fears of deflation as the Fed will have no qualms about printing dollars to stir inflation. Of course as the rest of the world struggles, the dollar might not get as weak initially as some might expect. The reports that factory orders fell 4.6 percent in November after a revised 6 percent decrease in October was another blow to energy demand. Inventories are high so production will stay weak. The latest headline on the weak manufacturing sector were the reports of job and run cuts at Alcoa. Supplies are rising pressuring the front months as well. Weak demand and a large contango is leading to expectations of an increase in supply. Expectations, according to the Bloomberg Survey, are for crude oil supplies to increase by 900,000 barrels from 318.7 million the week before. We are swimming in crude supply as we have 10.4% more supply that we did at this time a year ago. Gasoline should increase by 1.0 million barrels from 208.1 million. Supplies 3.4% below a year ago but gasoline supplies have risen in 12 out of the past 14 weeks. Distillate fuel inventories should rise by 1.1 million barrels to 136 million barrels and suppliers are 1.4% higher than a year ago. Refinery runs unchanged at 82.5 percent of capacity. Due to weak demand refineries are running at the lowest level since the October Hurricanes Gustav and Ike.
Overnight a total cutoff of gas supplies to the Ukraine from Russia is leaving many European countries out in the cold. Israel is opening a humanitarian corridor in the Gaza strip, raising hopes that maybe just maybe we could start talking about a cease fire. The AP is reporting that Hamas is studying peace initiatives to end the violence in Gaza but rejects a permanent peace with Israel, citing the deputy head of Hamas' political bureau. Exiled Hamas leader Moussa Abou Marzouk said there would be no talks about a permanent ceasefire and that as long as there is an Israeli occupation, there will be resistance
The Latest on the Russian Ukraine gas dispute, AFP is reporting that-European Commission Chief Jose Manuel Barroso telephoned the Russian and Ukrainian prime ministers on Wednesday to urge them to ensure that gas supplies to Europe are restored, a spokeswoman said. President Barroso spoke this morning to Prime ministers (Vladimir) Putin and (Yulia) Tymoshenko and he urged the Ukranian and Russian Prime Ministers to restore full gas supplies to the E.U. immediately. It is unacceptable that the E.U.'s gas supply security is being taken hostage to negotiations between Russia and Ukraine. An interesting take on the Russian Ukraine dispute was written by Liam Denning of Dow Jones Newswire. Liam writes, Fights between Moscow and Kiev over unpaid natural gas bills have become a winter fixture. But the latest one is different - which should have everyone involved worried. In January 2006, when Russia's Gazprom turned off the tap for the first time, energy markets were healthy and talk of a credit crunch was still considered impolite. That first cutoff had more to do with the Kremlin's anger at Ukraine's installation of a pro-Western government in 2005. Today, Russia is no less keen on regime change. But it also has pressing economic concerns. The prices Gazprom charges for exports of natural gas to Europe - four-fifths of which usually traverse Ukraine - are linked to oil. So in 2009, the lagged effect of the collapse in crude prices will hit its cash flow. Thane Gustafson, of Cambridge Energy Research Associates, reckons Gazprom's export revenues could drop by $24 billion in 2009. That's near the company's estimated $26 billion capital expenditure budget, according to Renaissance Capital. Gazprom's majority shareholder, the Kremlin, won't want to make up any shortfall given how quickly it is burning reserves defending the ruble. As for Ukraine, its monthly gas bill is roughly $800 million. Having tapped the International Monetary Fund for an emergency loan, the country struggles to afford this, let alone huge price increases threatened by Moscow. Mundane finance, as opposed to politics, makes resolution more difficult this time. In the short term, that is destabilizing for Ukraine. Read more on Dow Jones!!!