To find an extraordinary trade you sometimes have to ignore the ordinary.

- Phil Flynn

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August 29, 2007

Oil demand is surging! Gasoline demand is at record highs! You would think that the oil bulls would be dancing in the streets! Yet despite these stellar numbers and incredible demand numbers there are dark clouds on the horizon. There are fears that the future might not be so bright. Why? Well because there are fears that the so called sub-prime crisis will start to cause economic blight. Demand expectations for the future are falling and fuzzy. How long will it take for this sub-prime crisis to take a chunk out of energy demand? How do we predict how hard and how fast this will hit demand? How much of the slowdown has already been priced in and could this crisis present a great opportunity to make a big move in oil?

Forget about supply and demand; the new indicator for oil is the direction of the stock market. Oil has been tracking the stock market and at times moved with it tick by tick. In fact it was so close that I thought I was watching a new stock market index called the Crude Oil 500 or something. When stocks went lower on news that home sales hit a five year low the oil followed. But then later when the stock market recovered the oil rallied as well. Oil is afraid that demand will evaporate in the future but if they overestimate the magnitude of the slowdown we could see tighter supplies and much higher prices. And whatever your opinion as to how bad the sub-prime crisis really is, it should lead to a big rally or break in the oil market shortly.

This week gasoline has been a factor as demand increased for unleaded gasoline as crude prices were falling. This was a sign that things might not be as bad for the consumer as the falling confidence numbers indicated. After testing $70 per barrel oil drove higher following a surge in RBOB Gasoline.

We had a slew of refining issues this week that was keeping upward pressure on the crude. Yet fears of another shoe dropping have been keeping oil from rebounding strong. This week’s report of losses at Barclays and a dropping consumer confidence slowed momentum.

There are signs that the drop in gas prices may be coming to an end. RBOB futures led the petroleum higher this week driven by reports that Citgo Petroleum Corp slowed the operating rate of a fluid catalytic cracker at its refinery in Corpus Christi Texas. This of course came against a back drop of uncertainty over the issues surrounding last week’s fire at the Chevron Pascagoula, Mississippi refinery.

Yet the market is still being influenced by the macro outlook. Another scary week might be in store as reports that Barclays took some pretty hefty loses! The Financial Times reports that Barclays has been left with an exposure worth several hundred million dollars in failed debt vehicles created by its investment banking arm amid growing scrutiny over its links to Sachsen LB, the failed German public sector bank.

Even OPEC is worried about the potential fall out from the sub-prime mess. Yesterday OPEC’s Secretary-General Abdalla El-Badri said that “The Market is well supplied, there is no shortage of crude, but the picture is clouded because of the sub-prime crisis. It is up to the ministers to decide (on production) but I think the picture will be clearer in December.” Of course that means that unless things get real ugly on the stock side more than likely OPEC will stand pat at the September 11th meeting and that should keep a floor under oil for the near term. But can OPEC be spooked into cutting production in the next few weeks? Perhaps if we see a total stock meltdown they might.

Yet when the market trades on fears it can get out of balance. If the market fails to rally on strong demand news because it fears the unknown, the market can soon get undervalued. I think that we are setting up for a large pop this winter. Heating oil supplies are tight and if we underestimate oil demand we will use more oil than we would have if we correctly asses demand. It’s probably time to stand up to the fears and start to position long in oil.
 

Phil Flynn is Vice President, Energy and General Market Analyst with Alaron Futures and Options and is one of the world's leading energy market analysts. Phil heads the Alaron Energies Futures Brokerage Division offering brokerage services to individual investors, professional traders and institutions. Phil provides up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide.

Phil and his energy team were one of the first to predict that global crude oil prices would exceed $30/barrel in the year 2000, a correctly predicted market milestone that has highlighted the economic scene in the new millennium. Phil also called the rise of retail gas prices in 2001. Most recently, Phil Flynn has again accurately predicted that global crude oil prices would reach close to $40/barrel ($39.99/barrel) in 2004. Through hundreds of media interviews, Phil Flynn and Alaron Futures and Options have become familiar names in living rooms and boardrooms worldwide. The world's print, broadcast, online media and small businesses have come to rely on Phil's accurate and animated forecasts, analysis, speculative and hedging opportunities.

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Phil is one of the world's leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide. Now you can get this highly sought after analysis with your daily research newsletter from Phil Flynn. Learn more about this complimentary offer and sign-up today.