The Energy Report for Monday, September 14, 2009
Get ready for the supply side slide! Oil bloat may get the bull's goat as we are entering the weakest demand period of the year. Oil prices continue their downside move as Obama gets into a trade war with China and the dollar starts to show some signs of life. Oil bulls are now on the ropes as it gets harder to dismiss a global over supply. The 68 dollar a barrel area is the key as the oil bulls want you to focus on anything except current supply.
How high are supplies? Well if you want to believe OPEC, they are the highest they have ever been. OPEC says that oil supply forward demand cover in OECD Counties (Organization for Economic Cooperation and Development) stand at a record 61 days. That is 6 more days of coverage that the average for the last five years and according to Iran's Oil Minister, it's a record.
Whether it's a record or not, the key is we are well supplied. Just more evidence that oil is being supported by the dollar and market demand hopes. Of course at some point hope has to become a reality or prices will have to adjust accordingly.
And it is not just oil that is over supplied as we go into winter it is we are over supplied on distillates as well. Linda Rafield at Platt's points out that total OECD distillate inventories at the end July stand at 596.8 million barrels which is up 14.6 million barrels since last month and a build of 65.3 million barrels year-over-year. The truth is we have more oil and heating oil than we are probably going to need. In other words, it may take an ice age to remove the frost off the bull's tails.
For oil this is bringing in the contango, encouraging less storage going forward. In the short term, as the storage play becomes less attractive, we should see some of that floating oil in storage come to market. That could add to the glut and drive down prices. For oil the market, it needs to close below $68 and if it does we could see a washout to $59. This should be a great time to do option plays as well.
Trade war! Obama declared war on China trade putting tariffs on Chinese made tires. And despite warnings from Washington, China decided to retaliate. Who is following WTO rules and who is not? China said it would ban US chicken imports as well as imports of chicken and auto products. If this escalates more it can have a dramatic impact on many commodities! Stay tuned!
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Sell October crude at 7052 - stop 7350.
Sell October heating oil at 18400 - stop 18600.
We're short October RBOB from apprx 18510 - lower stop to 18200.
Buy October Natural gas at 285 - stop 275.