A cosmic comeback for oil futures that transcended a massive build in supply has many wondering if maybe we are looking at this market with one eye open or one eye closed. Can the fact that oil was able to comeback despite this colossal increase in supply is perhaps trying to say that there is something much deeper or maybe even clairvoyant about this almost mystical rally against some pretty heavy supply side odds. Could oil be signaling that maybe that forces seen and unseen in the universe are telling us that we are close to achieving a bullish awakening the could lead to bottom land bliss? Is it possible that the bulls have found a price level that they can hang onto even as the supply tide is seeming to rise faster than the polar ice caps are melting. That's right, I said melting. Will OPEC find inner peace as oil prices rise as the rest of the world falls apart?
Let's face it, the bulls have to be pretty bull-sie to try to buy into the market after that wildly bearish report. Across the petroleum board the builds defied expectations. The Energy Information Agency hit the market hard when it reported a mammoth build in U.S. commercial crude oil of 6.1 million barrels, raising them to 332.7 million barrels and putting supplies well above the upper and outer limits of the average range for this time of year. The sidebar story and the markets fascination with the spare capacity in Cushing, Oklahoma was maybe a slight disappointment to the bulls because with only a 200,000 barrel increase in the Oklahoma pad meant that, gee whiz, they may have a little room left to put some more oil.
Now if that was not bearish enough to get your bear claws out, how about a prodigious gasoline increase of 6.5 million barrels. Gas supplies are rising against a backdrop of a weak demand picture that is averaging 8.9 million barrel a day, down by 1.6 percent from the same period last year. We have to watch and see if the recent uptick in the retail price hurts demand even further as we go forward.
Yet the smallest build in petroleum was perhaps to some the most surprising of them all. Though I predicted an increase in supply there were many that could not imagine that distillates could actually rise in the face of a mini ice age. With the worst of what winter has to give us, the EIA reported that distillate fuel inventories rose by 0.8 million barrels and are above the upper limit of the average range for this time of year. Yes that's right, even in distillates we are above the upper limits of the average range which means maybe it wasn't that cold out there after all. Take those earmuffs off. Or maybe it is because industrial demand is just taking a massive hit. Definite continuing signs of demand destruction as distillate fuel demand averaged only 4.1 million barrels per day down by 2.6 percent from the same period last year. It must be foggy outside as all the planes seemed grounded as jet fuel demand falls 13.8 percent compared to where we were just a year ago.
Of course oil and the products dutifully got hammered, yet oil could not seem to get below $40 dollars. The market seemed to stall and later in the day had a seemingly miraculous resurrection. Could the rebound be a sign that the bulls are coming out of hiding? Is the market rising up to say that finally enough selling is enough? Is the market allowing the aggressive OPEC cuts and the shrinking contango to seep in the deep recesses of their total consciousness? Have we reached a nirvana were the collective bearish psychic has changed and will lead us to a new dimension of a market bottom. Or is this just another trap to crush the spirit and the beliefs of the battered, dogmatic bulls.
Even if you are focused on the now obviously overwhelming bearish fundamentals in petroleum, respect the moxie of a market that could rally in the face of such overwhelming odds. As a trader you have to remember the one market truth that ultimately bearish is what bearish does and bullish is what bullish does. The market place is not supposed to be what is in the here and now but what has yet to be and it is obvious that this market is looking for something as it looks out into the future. Yes it cared about the glut of supply but it cared even more about the fate of the economy and as a proxy, the state of the stock market. If the stock market has the courage to rally in the face of bad economic news then oil bulls will find hope that a turnaround in the economy along with OPEC production cuts and oil company project cuts can significantly alter the price of oil in the future. The key is whether this grandiose dream time has come or if it is still too early.
Obama talk of immediate stimulus caught stock sellers short and caused stocks to rally. Oil shorts followed. Which means if you think stocks have bottomed well then you can call a bottom in oil. Yet call me a skeptic if you like, if oil is at the bottom I say prove it. Hey I'd love to become a bull again but the charts have to confirm it. If oil can close above $50.50 I may have to dig my horns back out of the closet. Yet I fear that the economic outlook will still keep oil under the influence of the proverbial bear.
Has Obama been bullish or bearish for energy? In the short term he should be pulling for the bulls as it will mean the economy is recovering. Yet Obama is already putting his stamp on energy. Reuters news is reporting that the U.S. House Ways and Means Committee on Thursday approved $20 billion in energy tax credits and related financial incentives that are part of the Obama administration's plan to revive the American economy. Reuters says that the legislation's energy tax breaks would benefit the wind and solar energy industries, encourage energy-efficiency improvements to existing homes and help service stations recoup their costs for installing alternative energy pumps. That shouldn't pump energy up, should it? Of course it won't boost the economy anytime soon as it will take years for these alternative dreams to be realized. Reuters says that the economic stimulus package would extend by three years, to the end of 2012, the date that wind facilities would have to be in place to be eligible for the federal renewable energy production tax credit. Other qualifying facilities that generate electricity from renewable energy sources, such as biomass, geothermal, small irrigation, hydropower, landfill gas and ocean currents, would also have an extra three years through the end of 2013 to be in service to get the same production tax credit.
This comes at a desperate time for the alternative fuel industry. As Reuters reported many renewable energy projects are having a difficult time finding financing in current market conditions. The legislation would allow such facilities in place in 2009 and 2010 to temporarily claim a 30 percent investment tax credit instead of the production tax credit that is normally payable over a 10-year period. Reuters also reported that the legislation also extends tax credits through 2010 for individuals that make energy-efficiency improvements to their homes. Homeowners would get a tax credit equal to 30 percent (capped at $1,500) of the amount they paid for energy-efficient furnaces, hot water boilers and other energy savings improvements. Separately, the tax credit would be increased for service stations that install pumps that dispense alternative energy fuels like hydrogen, natural gas and gasoline made from 85 percent ethanol. For 2009 and 2010, the alternative refueling property tax credit would increase from 30 percent of the costs of the pumps (with a $30,000 cap) to 50 percent of the costs (with a $50,000 cap).The 30 percent tax credit for hydrogen refueling pumps would not change, but the maximum amount of the credit would increase from $30,000 to $200,000.
There is more from Reuters that several other House committees will take up other parts of the economic stimulus package and then send the measure to the Senate. The Democratic-controlled Congress hopes to have a final bill on Obama's desk for his signature into law by the Presidents Day holiday on February 16.
Still, many I have talked to in the energy industry think that this will be a lot of money wasted but I think there will be some benefits. We will get into this at a later time!
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We're short March crude from apprx 4354 on what is now a quadruple rollover! Stop 5350!
Sell March heating oil at 15500 - stop 15700.
Sell March RBOB at 12500 - stop 12700.