Alaron Energy Comment

CHICAGO - Dec 2/08 - SNS -- Following is the energy futures comment from Alaron Trading Corp.

OPEC Exposed! Well it is obvious with the massive drop in oil that the sheiks have no clothes. I know that's an ugly thought but who is going to tell them? OPEC's non-decision at the emergency OPEC meeting and the rising tensions over quota compliance could not have come at a worse time for the hapless and hopeless cartel. As the members of the cartel started to put compliance as a prerequisite to a December production cut, the market once again laughed in their face.

And why would it not? At this point, with the world economy deteriorating right before our very eyes, we have to ask:   does OPEC really matter at all? Well not when the economic walls seem to be closing in on the market. The market forces are so much larger than these rag tag group of  conspirators. Why should we care about OPEC when all the economic indicators seem to suggest that we are entering a new era of low oil prices? At the end of the day it is not OPEC that controls prices but the larger historic macroeconomic forces.  Oh sure, at times OPEC can have an impact on prices by withholding supply but overtime the markets are bigger than all of us. And the facts are that the data suggests that barring a major disruption of supply on massive scale, oil will have a hard time even holding on to the $50 a barrel area. Yesterday was a perfect example why.

Everywhere you looked yesterday the news was bearish for oil. We can start with China, a place  where oil demand was supposed to be unstoppable regardless of economic cycles, reported that their manufacturing sector was slowing dramatically. The China Federation of Logistics and Purchasing reported that its Purchasing Managers Index for China fell to the lowest level since the index started in 2005. Their version of the November PMI plunged to 38.8, down from 44.6 in October. Also, at the same time, the CLSA Asia-Pacific Markets said its PMI plunged to the lowest level since the index started in 2004, registering 40.9 in November compared with 45.2 in October. Manufacturing numbers are usually a good forward indicator of potential energy demand and these dismal numbers suggest that weak demand in China for oil and other parts of Asia will get weaker.  The weak economic news caused the Chinese to devalue their currency which caused  a record loss against the U.S. dollar  when it went limit down.

It's not  just dismal manufacturing in China but in the US as well. The ISM fell  to 36.2% which was the lowest level since 1982. The new orders index fell to an even worse 27.9%. Today's Euro Zone PMI is due. Europe has a huge drop in car sales and the National Bureau of Economic Research said we have been in a recession since December 2007.

So what is the Fed to do? They  can cut rates again but they are  running out of room.  The Fed said that they would go "unconventional" on us. Fed Chairman Ben Bernanke said that the Fed may take to buying treasuries to revive the economy because his room to lower rates is “obviously limited.â€� That does not mean he will not cut rates because Ben says that a rate cut is “certainly feasible.â€� But the thought that the Fed would buy bonds caused the long end of the yield curve to get crushed. Not only were people buying treasuries as a flight to safety but the thought that the Fed would be a buyer caused yields to a five decade low.

None of this bodes well for a rebound in energy demand. This year, as oil was being used as a pawn in this global economic crisis, I said that the gains would be unsustainable. That was  tough for me - the first  and long, long  term energy bull - to say, but I could not justify the market movement based on normal supply and demand fundamentals. The fact is  oil was reacting to the changing face of this economic crisis. As I have said  all year,  the rising price of oil is ok as long as it is being driven by demand caused by strong economic growth. If growth is the driver of price then oil could go to $200.00 a barrel and it would not matter because it would mean the economy was expanding.  Yet this year when oil spiked it was because traders were seeking safe haven from the falling dollar and on the false belief that the world had decoupled from the US economy. Now we are facing reality because  the economic truths that have been there since the beginning can no longer be denied.

Of course this sell off should help start heal the economy as well. If oil can go back into the thirties for awhile the benefits to the economy will be enormous. As it is right now, gas prices at the pump have fallen for 77 straight days. The national average price for gasoline is now $1.82 a gallon which is 64.3 cents less than a month ago, $1.248 less than a year ago and $2.294 less than the record high of $4.114. The drop at the pump may indeed have a hand in saving Christmas.

Yet despite all the bearish news natural gas rallied apparently on some new chilly forecasts. But also perhaps because of  the thought that dismal manufacturing demand could cause some producers to cut production. We may see some bounces.

I am getting an early start on my New Year's resolution to get caught up and to follow up on my Emails. As you can imagine with the volume of email that I receive that is a major task. If I have failed to follow up with you please feel free to email me again at  pflynn@alaron.com or call me at 800-935-6487 and it will make it easier for me to follow through  on my New Years Resolution. Now it is time for you to make a New Year's resolution to switch to the Fox Business Network where you can see me every day and to call me at 800-935-6487 to sign  up for your account today!

We're short January crude oil  from the double rollover from apprx 5760 -  lower stop to 5570!

We're long  January heating oil from  apprx 16000 -  stop 15650.

Buy January RBOB at 10700 - stop 10200.

Buy January natural gas at 615 -  stop 570.

Have a GREAT day!  

Phil Flynn

Alaron Research Team

800.563.9510

pflynn@alaron.com

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