Get daily research letters from Phil Flynn of Alaron Energies

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.

Oil is out of control; OPEC has lost control. Not only have they lost control of oil prices, as they admitted because they failed to heed the market and raise production, but perhaps of the entire cartel as it is degenerating into a joke and political theater. For an organization that has tried to gain credibility in recent years as a serious financial institution that was devoid of politics and only interested in a stable price of oil for the world market the latest OPEC summit was an unmitigated disaster. The dignity of the meeting was taken away from the two cartoon-like buffoons President Hugo Chavez of Venezuela and President Ahmadinejad in Iran both now seeking nuclear programs and both trying to turn the summit into a U.S.A. bashing event. President Chavez and President Ahmadinejad mocked the US and its currency with the Iranian president calling the dollar a ‘worthless piece a paper’ as opposed to the highly coveted Iranian Rial and most desired Venezuelan Bolivar. President Chavez for example said that the falling dollar was a sign of the collapsing US Empire, and Ahmadinejad said that $100 a barrel for oil is a paltry sum. He also cried that the US gets their oil and they get a worthless piece of paper. Chavez said that oil could go to $200 a barrel if the US was crazy enough to attack the Iran and that OPEC should set itself up as an active political agent. In other words OPEC should be an anti-America institution .Of course what this OPEC summit was supposed to be about was the environment and the long term security of supply and the stability of price, but in the end turned into a farce. If indeed OPEC is now a political machine that will use oil as a weapon against the west the relationship between western countries and OPEC will have to change. Western countries because of this threat will have no other choice than to stop at nothing to break the cartel and use its economic power to break its back. Of course that’s assuming that these two knuckle heads have the respect and influence over the rest of the cartel and the fact is they don’t. Other than Peru, the leaders of the rest of the OPEC countries were cringing as the clowns from Venezuela and Iran turned this summit from a respectable gathering to a joke that threatens to rip the cartel apart and erase the success they have had over the last decade. Though many in the cartel are concerned about the value of the dollar they realize that this reckless and uniformed kind of talk will not help the dollars fortunes and only cost the rest of the cartel more money in the short term. Comments like Chavez saying "Don't you see how the dollar has been in free-fall without a parachute? The Euro is a better option."

Iran Of course kept pushing to mention the dollar and Prince Al-Faisal of Saudi Arabia warned "As for the monetary aspect and the dollar I would like to ask his Excellency, the minister of Iran, to leave this question to the appropriate party, the ministers of finance, without mentioning that we gave them this task so that there won't be negative impact from OPEC." Of course Iran and Venezuela wanted to create as much negative impact as they can...

Of course this helped drive the oil but honestly as OPEC admits this price increase in oil is not about them, it’s about something much larger then them. It’s about worldwide economic growth. Oh sure the cartel tried to blame the speculators for controlling the price. Perhaps they are a bit jealous that the speculators could move the market but they could not.

Saudi Arabia's King Abdullah had tried to be a nice host and kept his cool but was visibly upset at the two goof balls that hijacked the summit as he tried to direct the focus of the summit towards bashing America instead of studying the effect of the oil industry on the environment. King Abdullah, also in a nice way, scolded Chavez for speaking for 23 minutes that was longer than the time allotted by royal protocol. He should have just told him to shut up like another leader told him to do last week. Listen the world should not care how OPEC wants to price its oil. The issue is not whether they price their oil in dollars or euros or even Bolivar’s. The issue is that these militant countries in OPEC want to try to take 40% of the worlds current oil supply and use it as a weapon to try to hurt the US. Of course with the pathetic economies of Iran and Venezuela it’s probably a credit to the Saudi’s that they allow these guys to attend these meetings and that anyone takes anything they say seriously. Yet with both these countries actively pursing nuclear weapons and their open hostility towards the west they have to be considered a threat to the market.

The comments did cause the dollar some weakness and oil is rallying but probably more on the assumption that OPEC has little spare capacity to slow the increase production and price will have to bring demand down. They are good at taking oil off the market to stop prices from falling but are powerless to stop it from rising.

What this means for oil is that we will see some great opportunities for trading. Whether it’s the big correction I see coming or the long term bullish outlooks that I see. Oil has been an exciting trade as all of the world’s financial centers have realized that oil is a strategic investment.

As close as we are oil probably will not hit 100 this year but should next year. Why did oil not hit $100 a barrel and why is $100 a barrel so important anyway? And what does our obsession with the price level of $100 a barrel say about us and the economy and the marker in general? Well it says a lot of things but first let’s talk about why we sold off yesterday.

The quest for $100 a barrel for the December contract was basically demolished as the weekly inventory report from the Department of Energy was bearish as I expected. The last best hope for $100 a barrel in 2007 came in the form of the delayed weekly inventory report which was a bearish surprise as a surge of imports and returning Mexican production found their way into the numbers.

And that was exactly what happened. Imports surged and refineries jumped back online and the Department of Energy reported that crude oil inventories rose by 2.8 million barrels to 314.7 million barrels. That broke a string of four straight draws in supply that had some analysts assuming that the slide would continue. Imports rose by 831,000 barrels a day to there highest level since the week of August 17th.

Gasoline supplies also fell in response to a noticeable drop in demand.

Distillates are still a concern and that helped the complex rally deep out of the hole but was not bullish enough to carry the entire complex on its back especially with signs all around that demand is reacting to the sharp spike in price.

Because prices spiked so hard and so fast towards $100 a barrel the market was bound to correct. The users of oil have cut back on its use responding to the sharp rise in price. The IEA (International Energy Agency) and OPEC both cut its estimate of world oil demand for this year and next. Both are saying that there are signs that oil prices close to $100 a barrel are depressing demand. Of course remember the further we fall away from $100 the opposite will be true.

I have said this before but the real reason demand is falling is price shock. Not price shock in the traditional oil economic calamity sense but shock from buyers that prices have gone up so fast. When prices rise sharply and quickly it takes some time for the buyers and sellers to catch their collective breath.

China has cut demand because it has been shocked at how fast prices have gone up. Companies that use oil have also taken a step back. Now if prices edged up a couple of pennies a week we might not notice but when we raise so fast it is a momentary shock. Its not that we won’t go back to our old habits but we want to see prices come back down and when they do we will start slowly increasing our consumption again and the next time we hit these high price levels somehow it won’t seem so bad.

I am not saying that oil won’t hit $100 a barrel, but I am saying that unless we get some type of major event it won’t happen this year. The Market seems to be adjusting to the higher price and the recent surge was high enough to assure that supplies will be adequate for winter. Many critics blame the speculators for the big move in oil yet what really was happening was the market going high enough to slow demand enough so that we would have enough supply. This is a classic example of how free markets are supposed to work and why despite record high prices are the economies of the world flourishing and we don’t see gas lines and shortages?

Even the Department of Energy says that the fundamentals justify the price.

Oil has been driven by fears and facts of tight supply. And it had to be driven higher and higher until we hit a price where demand finally dropped. And it fell in a significant enough fashion to basically assure us that we would have adequate supply.

The drop in demand is not a sign that the economy is necessarily weak but that it is moving too strong too fast. The price of oil had to put the breaks on US drivers and ravenous demand from China until the supply of oil could start to catch up. Already now we are seeing inventories of oil stop the downslide and that is a good thing. The critics will say supply was never tight and the increase in supply is proof. But I contend that supply would have a harder time rising if demand were was not curtailed. So the debate will go on between the bulls and the bears and ultimately the truth will be expressed in the price. Isn’t this free markets thing cool? And shouldn’t OPEC embrace it? For traders this will be the best of times and worst of times.

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.

Get daily research letters from Phil Flynn of Alaron Energies

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.