Beware! What goes up can go down a lot faster!

- Phil Flynn

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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.

Who knew? What did they know? And when did they know it? No, I am not talking about the Soviet style show trial in Washington with oil company executives. What I am talking about is who knew about the upcoming adjustments to the International Energy Agency's long-term supply forecast. It's obvious based on the markets quick dramatic move from backwardation to contango over the last few weeks that someone had a very good idea that the IEA was about to make a major announcement. This week I have been asking why the market in just a few short weeks had this sudden epiphany that the world was running out of oil. I have been asking why oil in the deferred contracts had an almost unprecedented gain of almost $8 a barrel on the front month contracts in just a few weeks. Now I think we all know why. Obviously some one knew something.

In a shocker that the International Energy Agency is lowering their long-term oil supply forecast for oil production raising fears that oil production will not be able to keep up with future demand. The kicker is that the IEA says that oil companies will only produce 100 million barrels of oil a day in 2030, which is 16 million barrels a day lower than their previous forecast. The IEA has been analyzing more than 400 oilfields that provide more than two thirds of crude today to determine how much they are likely to produce in the future.) The Journal says that "for several years, the IEA has predicted that supplies of crude and other liquid fuels will arc gently upward to keep pace with rising demand, topping 116 million barrels a day currently". Now the agency is worried that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day over the next two decades.

That is why Washington that oil companies need to make record profits. Because what this says that is oil companies are going to meet the oil demand needs of the future we will need record investment and much more than we originally thought. If oil companies are not making those profits investment dollars may end up going else ware leaving our national security and energy security more fragile.

Has the market finally priced in peak oil... again? Welcome back to the world of oil market contango where the far out futures are trading at a higher price than the front end of the market. One of the reasons why we kept hearing that oil has made this unprecedented and historic run was that the world was running out of oil. Of course you had to wonder if that was indeed the reason then why in heavens name were the further out futures contracts trading as much as a ten dollar discount to the front month contracts. The far out futures which are supposed to have mystical powers of predicting the future were actually signaling lower prices in the far out future ignoring the buying frenzy that was basically confined to the front end of the crude oil curve. If the world was running out of oil than why was cheaper next year as opposed to this year? If we had less then should it not cost more? Well that was at least until yesterday when the market after the fronts wild bull ride somehow decided that yes indeed we are running out of oil and it decided that, well official basically yesterday.

Of course what use is this for the normal human being? Seeing that until yesterday the market was in backwardation (a phenomena where the front month futures contracts trade at a premium or higher price to the back month futures) one must wonder if this signals just more wild bullishness to come or should we worry that the change is a sign that at long last a top is near in the front end of the oil curve. Because lets face it if the backwardation signaled a falling market as oil futures rallied almost $50 a barrel from the low perhaps the switch to contango could signal the opposite.

When I got bullish oil when we were trading the twenties my critics said you can not be bullish oil because we were in backwardation and the far out futures are signaling lower prices. If you believed the backwardation you would have been bearish when you should have been bullish. The same was true for recent times.

So maybe the change to contango is a significant sign that perhaps we are closer to the end of the run at least in the front end of the market. What it also could be signaling is that right now that demand for oil is much weaker than expected.

Oil supply is plentiful and the truth is demand is lousy here in the US yet stronger than expected growth numbers in Europe and business confidence in Europe is showing that they have been shielded somewhat by the strong Euro. Still that may not matter as the market is betting on more dollar weakness. Oil got a boost by the fact that the June contract was expiring and inflation fears gripping the globe. The Dollar got pummeled on the perception that inflation wary Europe would not cut rates putting further pressure on the weak dollar. Of course in a weird way that may fuel more inflation as the weak dollar is actually a major cause of a lot of the inflation in the first place. If Europe stays behind our curve it is the classic catch 22. The bottom line is that if Europe raises rates it will hit the dollar harder thereby driving up commodity prices putting more pressure on over all inflation. Europe's tough stance on inflation may actually create more inflation.

So if the world is indeed running out of oil and oil producers cannot keep up with demand then what is one to do? Ah yes, that's the ticket! Sue OPEC! That's right! That would be your first and brightest thought. Well at least that's what the US House of Representatives Brightest thought was. The House passed a bill that would subject OPEC oil producers to the same antitrust laws that US companies to follow. Now all we have to do is get the OPEC boys to come to court and watch those oil prices come tumbling down.

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.