Alaron Energy Comment

CHICAGO - Aug 14/08 - SNS -- Following is the energy futures comment from Alaron Trading Corp.

Georgia on its mind: A beaten down commodity complex recovers after being inspired by a bullish EIA report and a run for cover as President Bush talks tough on Georgia.

Commodities soared even as the dollar rallied which is a sign that part of the commodity rally was a safe haven play as the conflict between Russia and Georgia becomes more dangerous. The market is starting to realize that this conflict may have wider implications for Europe and the world at large and has a major energy component behind it.  Russia is emboldened by its stranglehold on energy supply and  feels that Europe and the rest of the world will let them get away with doing what they want as long as we  fear that Russia might play its oil card. In other words, will Russia cut energy  supply to Europe. Russia is feeling so bold that they went as far as telling the United States that  we must choose between Russia and project Georgia.

President Bush seemed to raise the stakes  for the commodity markets   when he said that the United States of America stands with the democratically elected government of Georgia. The President warned Russia that the US insists that the sovereignty and territorial integrity of Georgia be respected.    President Bush also said that Russia has stated that changing the government of Georgia is not its goal. The United States and the world expects Russia to honor that commitment. The President said that Russia has also stated that it has halted military operations and agreed to a provisional cease-fire. Unfortunately, we're receiving reports of Russian actions that are inconsistent with these statements. We're concerned about reports that Russian units have taken up positions on the east side of the city of Gori, which allows them to block the east-to-west highway, divide the country, and threaten the capital of Tbilisi. “We're concerned about reports that Russian forces have entered and taken positions in the port city of Poti, that Russian armored vehicles are blocking access to that port, and that Russia is blowing up Georgian vessels.  â€œWe're concerned about reports that Georgian citizens of all ethnic origins are not being protected.â€�

President  Bush said that Russia's ongoing action raises serious questions about its intentions in Georgia and the region. It struck to the heart of the markets worst fears. Is this Russian operation about gaining control of all the energy and the pipelines in the region? Is Russia going to use its energy might to force its will on its neighbors?

Georgia was a major focus yesterday  but so too was the weekly Energy Information Agency inventory report that raised worries about supply even in the face of softening demand. In many ways the report was an enigma. It raised supply concerns especially on gasoline. The EIA reported that gasoline inventories fell by 6.4 million barrels last week and are in the lower boundary of the average range. How low is that? Well Dow Jones points out that the surprise steep drop of nearly 6.4 million barrels in gasoline inventories to 202.8 million barrel in the week ended Aug 8, trimmed gasoline stock-cover to its lowest level since Nov23, 2007. That means according to the EIA gas stocks are sufficient to cover 21.5 days of demand, down from 22 days a week ago.

Yet how much of that draw was caused by hurricane Edouard and does that mater as demand falters. Gasoline demand dipped by 38,000 barrels a day to 9.446 million barrels a day last week which was down 1.3% from a year ago and the lowest for the week in August since2003. What is more the Federal Highway Administration reported that Americans drove 12.2 billion fewer miles in June than in the same month a year ago. The FHA said the 4.7 percent decline came while gas prices were peaking, and was the biggest monthly driving drop in a downward trend that began in November. During that period Americans drove 53.2 billion fewer miles November through June than they did over the same eight-month period a year ago which  is a larger decline than the 49.3 billion fewer miles driven by Americans over the entire decade of the 1970s.

That raises the question again, are refiners cutting back on supply because no one wants their product or because of the storm or both? Refinery runs dropped from a below normal 87 percent to an even more below normal 85.9%. Put that in perspective that refinery runs at 12 year low. Wow! Refiners cut back as gasoline imports fell 179,000 barrels a day from the week before. That was probably due to the storm.

Distillate demand on the other hand averaged 4.2 million barrels per day over the last four weeks which was up by 4.3 percent from the same period last year. But even with distillate fuel inventories falling by  1.7 million barrels week over week they are still well above the average range for this time of year. There is no one who does not think that distillate supplies are ample and we should head into winter with a good amount of supply barring any unforeseen circumstances.  

Interesting enough jet fuel demand is 8.5 percent lower over the last four weeks compared to last year.

The bottom line the drop in supply was mainly a storm and weak demand related event. That means that oil will have a hard time hanging onto the gains. With Japan in a recession and the BRIC countries and Europe struggling, the bulls more and more will have to count on geo-political events to keep this rebound alive.

And if all the state fairs  aren't corny enough for you Dow Jones Newswires reports that expected lower corn prices associated with stronger than expected production will provide a boost of usage by the ethanol industry this year quoting  the U.S. Department of Agriculture. The USDA said that, "Ethanol use is raised 150 million bushels as increased supplies and lower prices are expected to improve plant operating margins and capacity utilization rates" according to its monthly World Agricultural Supply and Demand Estimates report. Dow says that  U.S. ethanol producers are now forecast to consume 4.1 billion bushels of corn in the 2008-09 marketing year, up from a July prediction of 3.95 billion bushels. The ethanol industry consumed 3 billion bushels of cor n in the 2007-08 marketing year. That is a lot of corn!

Natural gas, according Bloomberg is looking for a  53bcf injection. Supplies are more than ample but concern about weather is lending support. Still near $800 we should start seeing a floor as a break below that area may discourage gas production. It's probably a good time to try to pick a bottom and buy some out of the money calls. you know what to do! Call me at 800-935-6487 and open your account! Ask for Phil Flynn!  

Also it is time for you to sign for your free trail of Alaronenergies and your copy of the Phil Flynn Energy Blast! All you have to do is call 800-935-6487 or email me at  pflynn@alaron.com also it is time for you to check out the Fox Business Network.

We're short September crude from apprx 12570 -  stop  11900!!!

Sell September Heating oil at 33000 -  stop 34100.

Sell September RBOB at 31000 -  stop 31300.

Stopped on long  September natural gas from  apprx 830  at apprx 810. Buy September natural gas at 810 - stop 780.

Have a GREAT day!  

Phil Flynn

Alaron Research Team

800.563.9510

pflynn@alaron.com

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