The Energy Report for Tuesday, March 25, 2008
To everything, turn, turn, turn€¦ It is looking more and more like we are hitting a major turning point, not only on oil but for the overall economy as well. Existing home sales hit their highest level since last October, a point when the Fed first made it clear the economy was facing a major crisis with a 50 basis point surprise interest rate cut. Oh sure I know some of those homes were sold at greatly reduced prices and foreclosures yet ultimately it€™s a sign that we are starting to see a bottom of the liquidity crisis.
It€™s not just me saying so, it's the market as well. As the old saying goes, by the time you realize you're in a recession you're probably well on your way to being out of it. First we saw a flight away from commodities as a safe haven and yesterday you saw a flight away from the bonds. These things were bought as safe haven from the gathering economic storm. The reversal of these trades makes it clear that the market believes that for now the worst is over. That's not to say that we could face new challenges going forward but the markets are saying that we are already seeing the light at the end of the tunnel.
For oil we now have to figure how much of the move was about a hedge against a falling dollar and how much of it was about scarcity of supply and rising demand. We know demand in China has been steeper do in part the cold winter and in part to the upcoming Olympics. China€™s oil demand rose by 6.2% in February. Yet in Europe and Japan we see signs of demand softening. Today€™s Wall Street Journal says that a likely US recession, rising inflation, and high interest rates are threatening to pour a little rain on India€™s growth parade. India€™s oil demand could fall as India saw its industrial production for nine months ending January 2008 grow by 8.7%, compared with 11.3% in the same period a year earlier.
Oil dipped below $100 a barrel for a short time before bouncing higher leading some to wonder if oil will try to use that level as a new floor. After the massive sell-off we have seen, oil may try to find some bargain hunters and may even try to mount a recovery rally but more than likely the market is headed back down for a test near the January lows of near $85 a barrel.
RBOB gasoline got a bounce as the market is focusing on the up coming summer driving season. Economic optimism is raising hopes that the trend of falling demand may reverse. There has been a lot of talk about the cost of additives. Yesterday's Wall Street Journal reported that, US ethanol isn€™t rising as fast as expected, although it might be enough to depress gasoline profits in the weakening economy this summer.
After additional ethanol capacity arrives in the first half of 2008, US ethanol output will be 2.7 billion gallons a year, according to analyst estimates. While that would be down 20% from prior forecasts, it would be a 33% increase compared to 2007 US ethanol output. The additional volume of that fuel poses a major worry for petroleum refiners, which face an uncertain gasoline demand, out-look this summer. The Journal says that The weakening US economy is hitting producers of both ethanol and conventional gasoline as both are competing for sales in a softening economy. High corn prices and shrinking financing availability have tempered the US ethanol boom in recent months.
Yet does ethanol really compete with gas. The key for gas is whether or not the rebound in the economy is fast enough to get drivers back behind the wheel and accustomed to paying $3.50 a gallon for gas.
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Sell May crude at 10420 - stop 10700.
Sell May RBOB at 26900 - stop 27200.
We're short May heating oil from apprx 28700 - stop 30000.
Sell May natural gas at 980 - stop 990.
Have a GREAT day!