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The Energy Report

Phil Flynn
December 12, 2007

Bears on Ice! Ice storms and power outages over shadowed Ben Bernanke and his Grinchie heart of ice. The stock market's icy response to the Feds quarter point cut normally would have been bearish for oil but this market has seen fire and rain. The rain would not have been a problem mind you if it had not turned to ice. Oil pipeline infrastructure can't get a break either. Whether it's fire, ice or rain and throw a little fog into the mix, you got one problem after another.

Ice Storms knocked out power and shutdown a key pipeline that runs into and out of the market sensitive Cushing, Oklahoma. The Magellan Pipeline that moves motor fuel to the Midwest was shut down due to a power outage to its fuel terminal and pumping station. The power was restored after the oil market was closed but that did little to ease the worries of traders that are starting to add the cumulative effect on supply because of the Enbridge fire last week and the fog in the Gulf and now the freakish frozen power lines. When are we going to start burying power lines in this country for heavens sake?

The Fed sure flopped on Wall Street as traders that priced in a quarter cut but hoped for a half point cut were disappointed. The big surprise is that many thought that the Fed would cut the discount rate charged to banks by a half but that was not to be. We bought the rumor and we absolutely slammed the fact but oil worried more about the weather than whether the Fed should have done more. Some say that the Fed is already planning more but not in the form of potentially inflationary rate cuts per say but perhaps by using other options. Perhaps using the discount rate to inspire banks to lend or auctioning off loans, etc. The Fed statement did say that incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. And that fact is probably evident in gasoline and oil demand.

Yesterday the Energy Information Agency of the Department of Energy revised first quarter global oil use down 250,000 barrels per day versus last month. Last week the MasterCard SpendingPulse lowered gas demand by 0.9% which is 2.7% lower than a year ago. The signs are mounting that demand is slipping.

David Bird of Dow Jones reported on the EIA Short-Term outlook that, “assuming a mild slowdown in global economic growth" and contending that recent high oil prices appear to have crimped demand, U.S. forecasters on Tuesday trimmed estimates for 2008 global oil demand. World oil demand will average a record 87.16 million barrels a day in 2008, up 1.6% or 1.38 million barrels a day above the 2007 level, the Energy Information Administration said in its Short-Term Energy Outlook for December. But that's down from an estimate of growth of 1.7%, or 1.46 million barrels a day made a month earlier. EIA warned that a deeper economic slowdown could cut oil demand growth further. In the U.S., the world's largest oil consumer, EIA scaled back its full-year oil demand figure to 20.6 million barrels a day, a slim 30,000 barrels a day reduction from a month ago. EIA now expects 2008 U.S. oil demand to be 21million barrels a day, up 1.2%, or 240,000 barrels a day, from a year ago, instead of 1% growth projected last month. U.S. oil demand for 2007 is expected to rise by 0.3%. In the first quarter of 2008, global oil demand is expected to average 87.44million barrels a day, a cut of 250,000 barrels a day from a month earlier and up 2.1% from a year ago. U.S. oil demand in the first quarter was revised up 30,000 barrels a day from a month ago, to 20.99 million barrels a day, a rise of just over 1% from a year ago.

China, the second-largest oil consumer after the U.S., is expected to show first quarter demand of 7.83 million barrels a day, down 100,000 barrels a day from the month earlier projection. China's oil demand in the quarter will be 7.83 million barrels a day, up 5.4% from a year earlier. For all of 2008, China's oil demand is expected to average 8.12 million barrels a day, up from 7.68 million barrels a day in 2007, but a modest 30,000 barrels a day below the level estimated a month ago.

"Global oil markets will likely remain tight" through 2008, EIA said, with demand growing "much faster" than oil supply from non-OPEC countries. Fairly low surplus capacity, rising demand and continued risks of supply disruptions in Producing countries will keep prices high, EIA said. EIA expects global oil inventories will be drawdown by an average of 1.04 Million barrels a day in the first quarter 2008; that's 22% less than the expectation of 1.33 million barrels a day drawdown made a month ago and 28% Less than the first quarter 2007 drawdown of 1.45 million barrels a day. EIA said global oil inventories held by the world's major industrialized countries will be just below five-year averages at the end of 2007. Global oil markets will likely remain tight through the forecast period.

EIA projects that world oil demand will grow much faster than oil supply outside of the Organization of Petroleum Exporting Countries (OPEC), leaving OPEC and inventories to offset the resultant upward pressure on prices. However, at last week’s meeting in Abu Dhabi, OPEC decided to maintain existing production targets, noting that, in its view, the global oil market continued to be well supplied. Additional factors contributing to expectations that prices will remain high and volatile through 2008 include ongoing geopolitical risks, Organization for Economic Cooperation and Development (OECD) inventory tightness, and worldwide refining bottlenecks.

As you can tell it's a very long and tedious report so read it in its entirety at your own risk of instantaneous narcolepsy.

Global petroleum market's expectations that tight market conditions will persist into 2008 are keeping oil prices high. Despite the OPEC decision to hold production steady at its meeting last week and downward revisions to projected consumption growth in 2008, the oil balance outlook remains characterized by rising consumption, modest growth in non-OPEC supply, fairly low surplus capacity, and continuing risks of supply disruptions in a number of major producing nations.

Although the balance assumes a mild slowdown in world economic growth, the major downside risk remains the possibility of a sharper-than-expected economic slowdown brought on by the fallout from the unsettled financial markets that would dampen oil demand and ease oil price pressures.

Consumption, China, non-OECD Asia and the Middle East countries are expected to remain the main drivers of higher world oil consumption through 2008. World oil consumption in the fourth quarter of 2007 is expected to rise by 1.7 million barrels per day (bbl/d) above fourth quarter 2006 levels and oil consumption in 2008 is projected to rise by 1.4 million bbl/d. Both projections are slightly lower than last month’s assessment. Indeed, higher prices appear to be dampening oil consumption in a few countries, including the United States. In 2008, China alone is expected to account for over 400,000 bbl/d, or one-third, of world oil consumption growth. Downward revisions, however, in consumption growth are certainly possible, particularly if the slowdown in world economic growth is greater than expected.

Indeed it is a very, very, very...long and tedious report.

Stay warm and safe on the ice! Call me at 800-935-6487 or email me at pflynn@alaron.com to open your account.

We're short January crude from apprx 8890 - stop 9200.

Sell January heating oil at 25400 - stop 26000.

We're short January RBOB from apprx 229 - stop 236.

We're long January natural gas from apprx 710 - stop 680.

Have a GREAT day!