Number Nine. Number Nine. Number Nine. Bottle of claret for you if I had realized. We'll do it next time. I forgot about it, George, I'm sorry. Will you forgive me? What's freakier than the Beatles Revolution Number Nine? Well perhaps the state of the global oil market on 9/9/09.

Oil prices surged yesterday as traders, fresh back from the Labor Day weekend, decided that it was a good time to take a risk. Gold bugs came out of the wood work buying on inflation fears and perhaps the dream of a new world currency order. The dollar index hit a new low for the year as the G-20 said that the stimulus would continue to flow freely. Even the UN piled on to the dollar drubbing by suggesting in a UN Conference on Trade and Development report that the dollar should be replaced as the world currency. Why the market takes a suggestion by the UN seriously is beyond me as they can't even seem to agree on what they agree on. Yet the anti-dollar mood is growing as rising deficits and runaway government spending is shaking confidence in the greenback. China, a major holder of US debt, is actually issuing bonds in Hong Kong as it tries to establish the Renminbi Yuan as a global currency. Of course their currency is controlled by the government anyway.

All of this intrigue gave oil a reluctant boost at first but later, as some bullish news of China came to light, oil seemed to rally on its own merits. Let's face it, as of late oil has not wanted to rally just on dollar weakness or stock market moves. This is a market that had been feeling heavy because of a heavy overhang of supply. This is a market that wants to see data that supports the type of demand growth that may at some point cut into over supply. Oil traders have been looking to China as the great demand hope yet recent data from there has been a bit mixed. Yet the report yesterday that China's auto industry saw sales growth that would make any cash for clunkers fan blush seemed to help inspire some oil buying confidence. China reported that sales of passenger vehicles increased 90% in August over a year ago. Passenger-vehicle sales in China rose to 858,300 units! China's overall auto sales rose 82% in August to 1.14 million units. That is going to be a lot of gas that is sold. That news not only gave support to oil but to platinum and palladium prices, both metals that are integral in auto production.

Do you ever wonder why it seems sometimes that Mexico is better trading oil than producing it? Yesterday Javier Blas in the Financial Times reported that Mexico is set to make a record 8.0 billion dollars from financial contracts it bought last summer as insurance from weak energy demand and lower prices this year. In another story Bloomberg News reported that Mexico's credit rating may be cut as early as next month on concern government proposals to boost revenue won't be enough to narrow the budget deficit quoting RBC Capital Markets. Mexico's shrinking economy and a 31 percent drop in oil prices in the past year have cut into tax revenue, widening the 2009 budget deficit to 3 percent of gross domestic product from 2.1 percent in 2008, according to the government. Standard & Poor's has warned that the country must create new sources of revenue to offset declining oil income if it is to avoid a downgrade of its debt rating before the end of the year. Maybe they should just trade oil or let US oil companies fix their declining oil production rates.
After the rush to get back into the markets we will need to see more news to keep the drive alive. As impressive as yesterday was one day does not change the fact that we are swimming in supply. OPEC will stand pat and pay homage to compliance but the key is that we will need news to keep the move going. If not we should see a big correction.

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We're short October crude from apprx 7090 - stop 7220.

Stopped on short October heating oil from apprx 19000 - at apprx 17850! Sell October heating oil at 18400 - stop 18600.

We're short October RBOB from apprx 18510 - stop 18930.

We're short October natural gas from apprx 270 - stop 310.

Phil Flynn
Senior Market Analyst