Oil has a glut and OPEC is in a rut but a falling dollar and a crazy draw in crude supply from the API keeps the bulls smiling for another day. Yet at what point will supplies start to matter as it is apparent that supplies will continue to outpace demand.

Take for example the fact that the Energy Information Agency cut its forecast for global oil demand growth in 2010 by 30,000 barrels per day to daily demand of 84.58 million bpd. But it boosted its forecast of global oil production growth by 150,000 bpd to average output of 84.65 million bpd. Now when you do the math that would mean oil production would outstrip demand by 70,000 barrels of oil a day, oil that would more than likely pad already abundant global oil inventories? The EIA seems to suggest that the market may have overestimated the impact China will have on global inventories. Reuters News points out that, The agency said while the current outlook assumes the world economy begins to recover at the end of this year, projected strong oil demand growth in developing countries will be partially offset by weaker oil use in industrialized nations, contributing to the supply surplus.

Not even OPEC could stop it as they agreed to hold production steady but at the same time sent signals that they were currently at levels that they could not cut back anymore. The problem is non-OPEC producers like Russia is currently producing more oil than Saudi Arabia and refuses to cut back on production. This means that OPEC cannot cut back without their cooperation so it is likely that OPEC quotas are as low as they are going to go. And with Russia stealing market share, the temptation to cheat is so much higher. In the past this these types of conflicts has led to more production not less and it is likely that this will inspire a future price drop.

Of course short term, none of this matters as the focus will be on oil inventories. Last night the American Petroleum Institute reported some jaw dropping numbers that once again will have analysts scratching there heads. The API reported (are you sitting down) that US crude supplies fell by a whopping 7.2 million barrels. Can you get more bullish? Yet at the same time they reported a gigantic build in distillate supply of 3.3 million barrels. Of that 1.8 million barrels of that was heating oil bring supplies to a more than cozy level as we head to winter. If anyone cares the API reported that gasoline supplies rose by 571,000 barrels.

Well if you are interested in gasoline at the end of this driving season, it might interest you to know that  according to the MasterCard SpendingPulse report that gasoline demand fell to the lowest  level since January last week ahead of the big Labor Day holiday weekend. As reported by Bloomberg News motorists bought an average 8.97 million barrels of gasoline a day in the week ended Sept. 4.That's the least since the week ended Jan. 9 and the third time this year that daily fuel consumption has fallen below 9 million barrels. According to the report gasoline demand was 2.4 percent less than a year earlier and 1.4 percent less than the week before.

Weak demand for crude and crude grade differentials has caused problems for refiners as they scramble to make cutbacks to save from losing money. Barbara Powell at Bloomberg News reported that Valero Energy Corp., the largest U.S. refiner, is shutting coking units and processing lighter oil to increase refining margins. Executive Officer Bill Klesse said that Valero is cutting its use of Mexican Maya crude by 60 percent, along with shutting cokers and fluid catalytic crackers. He said that he expected consolidation and rationalization of assets throughout the industry. Refiners once thought to have licenses to print money are now scrambling to make some.

Here are some of the Highlights from the EIA Short Term Energy Outlook. For crude they say that volatility persists on spot prices, although over narrower ranges than seen earlier this year and last year. The EIA expects the price of West Texas Intermediate (WTI) crude oil to average about $70 per barrel in the fourth quarter of 2009, a $27-increase over the first quarter of the year.

The EIA expects the monthly average regular-grade gasoline retail price to fall from $2.62 per gallon in August and September to an average of $2.56 per gallon over the fourth quarter of 2009. Higher crude oil prices next year contribute to an increase in the annual average gasoline retail price from $2.34 per gallon in 2009 to $2.70 in 2010.  Projected annual average diesel fuel retail prices are $2.47 and $2.88 per gallon in 2009 and 2010, respectively.

EIA projects the monthly Henry Hub natural gas spot price to average $2.32 per thousand cubic feet (Mcf) in October, the lowest monthly average spot price since September 2001. Natural gas inventories likely will set a new record high at the end of this year's injection season (October 31) reaching more than 3.8 trillion cubic feet (Tcf). The projected Henry Hub annual average spot price increases from $3.65 per Mcf in 2009 to $4.78 in 2010. However, upward price pressure next year is limited by the sensitivity of natural gas use in the electric power sector to higher natural gas prices and continued expansion of U.S. natural gas production from shale formations.
EIA expects electricity retail prices to show year-over-year declines next year for the first time since early 2003 because of lower fossil fuel costs for generation. The projected annual average 2010 residential electricity price of 11.4 cents per kilowatthour is about 2 percent lower than the 2009 average.

Stopped on short October crude from apprx 7090 at apprx 7220. Sell October crude at 7352 - stop 7550.
Sell October heating oil at 18400 - stop 18600.

We're short October RBOB from apprx 18510 - lower stop to entry price 18510.

Short October natural gas from apprx 270 - stop 310.