Crude Oil
Sally Limantour
January 28, 2007
The energy markets had fresh news on all fronts with weekly prices closing higher for the first time since mid December. If you are trading energy you have to keep tabs on the weather, OPEC, MEND (Nigeria), Iraq, Iran, Venezuela, Mexico, stocks/usage and alternative energy news. It is a full time job!
President Bush’s State of the Union address last week called for, “twenty in ten” where he proposed cutting US gasoline demand by 20% in 10 years with plans to switch to alternative fuels by 15% and another 5% to be saved by increasing fuel-economy standards. He also announced a goal of using 35 billion gallons per year of alternative fuel by 2017. This is 7 times the current level and about 5 times the current Renewable Fuel Standard of 7.5 billion gallons by 2012. This is an extremely ambitious goal as there just isn’t enough US farmland in the US to produce that much corn.
The January reports from the US DOE/EIA and the monthly OPEC report showed demand growth forecasts were basically unchanged. There were, however, downward revisions in the non-OPEC supply forecast by the IEA which were cut by 300k/b in 2007. Talk of China building strategic oil reserves was an added bullish demand factor and it is now estimated that the US and China will account for over half of the world’s consumption growth in 2007.
This coupled with the colder weather patterns and violence in Nigeria all helped to prop up prices of crude oil after it briefly broke the $50.00 level. The sell off in crude oil from the highs of last August has occurred in two waves. The first wave occurred between August and late September as the market was working off the potential hurricane premium and it was exhibiting lower geopolitical premium. The second sell off happened during December through January and this was due to the warm weather and the rebalancing of the commodity index in January. What is next for crude oil? It seems that with speculation of a US military strike against Iran or a potential oil embargo in the air that perhaps crude oil has seen its low for now. The push to fill the Strategic Petroleum Reserve with initial purchases of 11 million barrels is also supportive. I am currently watching the crude oil from the long side. If we can hold above 52.50 and build support above $54 for a while the market could attempt a mildly bullish stance. Perhaps, at least this would silence those calling for $30 oil.
There is an interesting relationship with the CRB and energy. The crude oil sell off from the highs in August has caused the CRB to break important support levels. As a result many have claimed the commodity bull market is over. A closer look however shows that there has been a radical revision in the CRB index since July 2006 which has skewed the overall makeup of the index. This 10th revision now has oil making up 33% of the index and this has huge implications for those watching the CRB. I urge everyone to read the excellent piece by Adam Hamilton at (www.zealllc.com) titled, CRB Dominated by Oil, for a complete understanding of this change.
