PIGS in space.

When I go down on the trading floor and talk about pigs, normally I am referring to hogs or pork bellies. But this week is something different. We'll focus our attention on Portugal, Ireland, Greece and Spain. Or you can exchange or add another I if you want to throw in Italy. In this case PIGS - or PIIGS - is not the other white meat, but a cause of great concern on the global economic scene. 

Portugal now seems to be the main epicenter of the constantly shifting risk factors in the ongoing global economic crisis. Even casual observers of the global market place have been aware of the recent problems growing in the Eurozone particularly with Greece. The massive debt in Greece has roiled the global market for most of the year and now there are fears that their problems may be spreading throughout the region. Oh sure, the other countries within the designation PIGS or PIIGS if you prefer, did not want to be coupled together with Greece perhaps because they did not want to be part of something called PIGS or because they were fearful that the association with Greece and their problems could spread to them faster than a winter cold. Spain’s Finance Minister Elena Salgado was one of the first to speak out and said that Spain's situation is not like that of Greece. Yet earlier this week it seems that when one of these little PIGS’s went to the market and found that things were not that good.

The market really got fearful after Portugal basically had a failed bond auction. The Portuguese treasury and Government Debt Agency tried to sell €500 million in 12 month bills but was only able to sell €300 million. This raised concern that buyers of debt are getting tired of getting low rates of return when sovereign countries credit worthiness is not what should be. Last year Portugal’s debt was 9% of its GDP and with a potential softening in the EURO zone, bond buyers think that their chances to be paid back might not be that good. Obviously that means that bond buyers will demand a higher rate of return to take on more risk thus ultimately driving up interest rates in Portugal and throughout the region as debt strapped nations vie for capital to fund their out of control spending.

What kind of warning does this send to the rest of the world and even the US? It is clear that this out of control massive spending is going to have to come to an end as the market is going to be wary of investing in what may turn out to be a massive global spending and borrowing Ponzi scheme. Debt buyers will demand either outrageously high rates of return for continued out of control spending or demand that these governments get their fiscal house in order before investors feed money into the globes massive borrowing binge.

In the short term even though this should be an early warning to the US and policy makers of the rising risks associated with the perilous path we are on. In other words, don’t keep spending like PIGS. This also has the ability to change the major market play that has basically been in place since March of last year. That was the US Federal reserve went to a policy of quantitative easing. That was the day Fed decided to fight deflation by printing a floor under the price of oil and gold and other commodities to fight off the demons of a deflationary death spiral. That was the day that the dollar became the doormat for the world and Europe, allowing the creation of the carry trade so banks could dig themselves out of debt by borrowing in overnight lending markets at rates near zero and invests in higher-yielding securities in other places around the globe. This drove the dollar lower and drove commodities and risk takers when in the mood took their free money returns from the carry trade tried to maximize their profits by buying gold and copper and other commodities may flee those investments in the short term back to the more familiar global risk currency the dollar and the never defaulted US Treasury (at least not so far). Yet this uncertain outlook and PIGS cloud that hangs over Europe. Other PIGS countries are on the watch list and it is clear that these countries are going to have to or get bailed out or ultimately collapse. Yet a government reigning in spending and taking away free goodies is not as easy as it seems. Greece is in an all out effort to get its fiscal house in order.

The AP reported of strikes in Greece and political wrangling in Portugal amid concerns that leaders in Athens and Lisbon would not be able to push through unpopular austerity programs to tame their ballooning deficits. The AP says that Greece, under intense pressure from markets and other European Union governments to get a grip on its deficit, faced a first wave of strikes, with customs and tax officials walking off the job for 48 hours. This won't be easy.

Of course if the lack of investor confidence spreads throughout the PIGs and the rest of Europe all the places that money has flowed will flow elsewhere. We could see a massive unwinding of the global carry trade and that could have huge impact on the value of the dollar and on global stock markets. If the US is going to be that safe haven. then the US is going to have to lead by getting its spending under control. That too would be much easier with a strong jobs market. Bottom line: if we see renewed fears in Europe look for surge in the dollar and for the commodity correction to continue.

For oil this involvement of the PIGS problem is another reason why we are still very bearish on oil. As I have said for some time, oil is headed down towards $40 a barrel. Not straight down mind you, but things are bearish in so many ways. We are bearish because demand is bad and these types of credit concerns could lead to more demand destruction. We are bearish because some of the money that has been flowing to Asia may go back to the US dollar as concerns about a bubble in China would rise as they try to reign in credit. Still oil must get below $7240 before we see the next leg down. Until then check me out each day on the Fox Business Network or call me at 800-935-6487 or email me at pflynn@pfgbest.com to open your account.

A breaking oil market seemed to rally quickly after a headline crossed that said, “WHITE HOUSE: Reported rocket launch by Iran would be a provocative act.” Oh my gosh! Rocket launch! What was that, Get Me Out! Well that seemed to be the reaction or a higher buy got triggered but the story had come out earlier. The report did say that the White House reported a rocket launch by Iran would Be a "provocative act.", but the White House was still checking out reports of the launch. The Kavoshgar 3 (Explorer) rocket was launched Wednesday, Iranian state-owned Al-Alam television reported.

Apparently Iran State run TV reported they fired a rocket into space carrying live animals like a rat,a turtle and some worms. They say it has nothing to do with wanting a nuclear weapon but only a scientific study. Critics say they can't think of any scientific study of merit that would include sending worms up in space. Well the truth is there could very well be a good reason to send a worm into space. Maybe they were testing it to see if it could survive being dropped into a bottle of tequila while in space.

After the report of the rocket launch the market really seemed to focus on what was a bearish inventory report from the Energy Information Agency. Like I said, what seemed to be the most important part of this report was the weak refining activity. The EIA reported that U.S. crude oil refinery inputs averaged just 13.5 million barrels per day during the week ending January 29, 163 thousand barrels per day below the previous week's average. Refineries operated at 77.7 percent of their operable capacity last while gasoline production decreased and averaged only 8.6 million barrels per day. Distillate fuel production decreased last week, averaging 3.5 million. David Bird at Dow Jones points out that the four-week runs were the lowest since Oct 10, 2008, when Gulf Coast refineries were hobbled by hurricanes. Excluding Hurricane-impacted operations in 2008 and 2005, the four-week level of crude runs was the lowest since March 14, 1997.

Those low runs helped crude supply rise and products fall. The EIA says that US commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.3 million barrels from the previous week. At 329.0 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories decreased  by 1.3 million barrels last week, and are above the upper limit of the average range. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories  decreased by 1.0 million barrels, and are above the upper boundary of the average range for this time of year. Propane/propylene inventories decreased by 2.9 million barrels last week and are below the lower limit of the average range. Total commercial petroleum inventories increased by 0.7 million barrels last week, and are above the upper limit of the average range for this time of year.

The EIA says that demand as expressed by total products supplied over the last four-week period has averaged 18.8 million barrels per day, down by 2.0 percent compared to the similar period  last year. Over the last four weeks, motor gasoline demand has averaged 8.6 million barrels per day, down by 0.5 percent from the same period last year.  Distillate fuel demand has averaged 3.7 million barrels per day over the last four weeks, down by 9.1 percent from the same period last year. Jet fuel demand is 0.2 percent higher over the last four weeks compared to the same four-week period last year.

Bottom line: will refinery run cuts fall below the lackluster demand numbers? If that happens than can poor demand all of a sudden becomes bullish? George Orwell at DTN said that the entire energy complex recovered quickly as traders turned to buying gasoline crack spreads in anticipation of tight supply in the future as refiners continue to idle or shut plants due to low margins.

If demand is so bad why are manufacturing numbers so good? Are the factories running on some new kind of fuel? Worm power perhaps?  Bottom line we think bearish will still end up being bearish. We think these weak demand numbers ultimately will be the bulls undoing. Long term traders keep your shorts in place. Call me for bearish option strategies and day trade numbers at 800-935-6487 or email me at pflynn@pfgbest.com to open your account. See me every day on the Fox Business Network.    

The Energy Report Wednesday February 3 2010

Maybe that ground hog is something special after all. Oil futures fly after the ground hog say his shadow and predicted 6 more weeks of winter. And by the way no I did not see my shadow and yes I heard that one before. Still oil joined the stock market in the biggest two day rebound in over three months. Oils sudden resurgence comes on the backs of some renewed economic optimism especially in the manufacturing sector but also because of some concerns about the disruption of supply. RBOB Gasoline lead the rally gaining even more support from refineries that are closing on purpose and some that are not. Oh sure most of the move in oil seemed to be macro economically motivated but word that Valero Energy Corp. shut a fluid catalytic cracker at its Quebec City refinery after a fire sure helped gasoline lead the way. Bloomberg news said that the fire was reported at about 2 a.m. local time at pumps on the gasoline-making cat cracker, Bill Day, a company spokesman, said in an e-mail. No injuries were reported. The blaze was extinguished at 4:40 a.m.     The 66,000-barrel-a-day cat cracker has been shut down and an estimate for the restart of the unit is pending a damage assessment, according to Day.  The refinery has a capacity of 265,000 barrels a day, according to data compiled by Bloomberg.

Cold weather also helped the products because as the ground hog accurately predicted winter refuses to go away quietly. The U.S. Climate Prediction Center forecast below-normal temperatures from Texas to New England from Feb. 7 to Feb. 15. Matt Rogers at Commodity Weather Group, LLC is also predicting a stronger cold push for the middle of nation next week. How does that stupid ground hog do it?

  On top of that traders wanted to cover their positions ahead of the American Petroleum Institute Report oil inventory report. Some had fears that the shutting down of the Sabine Ship channel may cut into supply. Well according to the API those fears were unfounded. The API reported that Crude stocks increased y a much more than expected 4.7 million barrels. The products are more nondescript with gas stocks falling by 1.2 million barrels and distillates falling by 1.0 million barrels. The API showed that crude imports were up by 322,000 barrels while product imports were down. If The Energy Information Agency, the arm of the Department of Energy shows such a large build that should slow the bullish momentum a bit, That is unless of course the stock market keeps soaring ‘

Long term Bears I never said that the move to the $40 handle would be easy and to expect swings back along the way. I have been saying that oil is in a long term wavy down trend that will take some time to complete. We are going to expect some big snap backs and rebounds along the way. Yesterday I said that “With oil back over $75 if we continue to see the stock market rally oil could make a run back towards $77.” That happened obviously very quickly and it should offer some good opportunities to put on your long term bearish stagiest. Where am I wrong?  I would be wrong if oil closes back above $85. That would negate my long term bearish pattern. Still I think that a move above $85 is unlikely as the dollar seems to be finding some stability and despite the recent increasing demand hopes the globe is still well supplied with oil.

The best way to get a real time recommendation in real time is to call me at 800-935-6487 or email me at pflynn@pfgbest.com And the best way to have a great trading day is to always keep your television set tuned to the Fox Business Network

What is good for Exxon Mobil is good for America.

The mood shift across the stocks and commodity markets was enough to wake a sleeping ground hog. Wake up you silly ground hog, the market seems to sense a change!

Gone is that sour and gloomy mood that was oh so January. February seems to have given the market some new life. What seemed to give us that sonic hedge hog boost? Well I guess you can say Exxon Mobil. Once again it seems that what is good for Exxon Mobil is good for America. When Exxon Mobil does well it seems America does well. It was Exxon Mobil's better than expected earnings that seemed to set the stage for what turned out to be a pretty awesome day. Oh yes there were rising geopolitical issues with Nigerian rebels blowing up pipelines and increasing tensions with Iran, but really at the end of the day it was that Exxon Mobil Magic that seemed to get the risk takers back in the market and off of the fence.

Those Exxon Mobil earnings set the stage for that awesome ISM Manufacturing number, a number that normally is a forecast for future strong energy demand. The ISM blew away expectations surging to a monster 58.4%, the highest level since August of 2004 raising hopes that energy demand will stay strong as factories step up production to meet that rising demand. It also sparked some inflation fears as well as the prices paid index hit 70% up from 61.5%. Those renewed inflationary fears, along with the perception that this number could improve the jobs outlook (the employment index component surged to 53.3% from 50.2%) gave the perception that perhaps that strong GDP number was not all smoke and mirrors and actually is showing that there is at least something happening in the real economy. You know, the economy on so called Main Street. Plenty of good houses are still available. But let this be a warning: some may have to have a ground hog removed.

Of course these economic good feelings seem to have saved the oil market from a total breakdown. Oil held key support above 72 a barrel and if you use you imagination and allow for a bit of slippage, we seemed to have put in a minor double bottom around 7245 give or take a tick. Maybe even a triple which could be telling us a test again in the future. With oil back over $75 if we continue to see the stock market rally, oil could make a run back towards $77. Long term players we are still looking for a move back into the forties. Use this rally to try to put on bearish option strategies. Day traders and short term traders we are in a long term wavy down trend and should give us the opportunity for some pretty wide swings. Call me for the latest numbers at 800-935-6487 or email me at pflynn@pfgbest.com to open your account. And don't forget to see me every day on the Fox Business network! 

Dow Jones reports that overnight Nymex crude went up slightly after Nigeria's MEND says militants sabotaged Shell pipeline but notes it wasn't directly responsible. Shell earlier said sabotage of a pipeline had shut down three flow stations in Niger Delta, after militants Saturday threatened "all-out onslaught" on local oil industry. 

And if Nigeria is not enough, what about new tensions with Iran? The Guardian out of the UK is reporting that, “Tension between the US and Iran heightened dramatically today with the disclosure that Barak Obama is deploying a missile shield to protect American allies in the Gulf from attack by Tehran. The US is dispatching Patriot defensive missiles to four countries: Qatar, United Arab Emirates, Bahrain and Kuwait and keeping two ships in the Gulf capable of shooting down Iranian missiles. Washington is also helping Saudi Arabia develop a force to protect its oil installations. American officials said the move is aimed at deterring an attack by Iran and reassuring Gulf States fearful that Tehran might react to sanctions by striking at US allies in the region. Washington is also seeking to discourage Israel from striking Iran by demonstrating that the US is prepared to contain any threat. There was also a report that Iranian President Ahamadineajad is making a threat saying, "Iran will deliver a telling blow to global powers on Feb. 11.” An early Valentine present perhaps?

Oil failed to take out the key $72.00 support area so we could see a bit of a rebound. Long term players we are keeping our longer term bearish outlook. We have been saying four sometime that oil is headed down to the $40 handle and long term players should target that area. Last month oil had the biggest peak to valley drop since December of 2008 which obviously fits in with our bearish outlook. Make sure you are getting the latest news by calling me at 800-935-6487 or email me at pflynn@pfgbest.com to open your account. Also remember to check me out each day on the Fox Business Network.   

A Friend in Ben.

Ben, behind your back you look no more, you found votes that you were looking for. Instead of rent I now will own, I’ll never pay the loan, and you my friend will see, my interest will be free. You’ve got a friend in me.
Ben, you may have cut a deal here and there but you felt not wanted anywhere. If you ever look behind and don't like what you find there’s one thing you should know you can always print some dough (you've got a place to go).

The banks used to say "I" and "me". Now it's "us", now it's "we". They used to say loan and fee then went bust, now it's freeze. Ben, some wanted you to go away, I don't listen to a word they say. They don't see you as I do, I wish they would try to. I'm sure they'd think again if they had a friend like Ben (a friend) Like Ben (like Ben) Like Ben.

Well Fed Chairman Ben Bernanke is back and commodity bulls must be jumping for joy. Big Bad Ben or Mr. Bubble as some would like to paint him, is the architect of the commodity bull market or bubble depending on your point of view. The oil bull market has been, of course, courtesy of your Federal Reserve under Mr. Bernanke and you would think that the oil bulls might have been a bit more excited. Yet it seemed that the promise of that Bernanke magic wasn’t enough to inspire an uninspired energy complex. Oil seemed to hold up better than say the beleaguered stock market but Ben and his alleged back office deal to keep the printing presses running and fears of rising political control over the so called independent Fed was not enough to shake off the bearish mood in oil. Oil waffled up and down and could not seem to muster a rally and failed to take out what is the $72 resistance. If $72 is breeched to the downside, it should take oil for a quick ride down to the $65 a barrel handle. Still oil seems to be reluctant to move too fast with Ben still in charge of the printing presses.

And why should we not be bearish? Reuters News reports the International Energy Agency is saying that oil use in rich industrialized countries will never return to 2006 and 2007 levels because of more fuel efficiency and the use of alternatives, the chief economist of the International Energy Agency said on Thursday. This bold prediction, while made previously by some analysts, is significant because the IEA advises 28 countries on energy policy and its oil-demand forecasts are closely watched by traders and policymakers. Faith Birol of the IEA said that when we look at the OECD countries - the U.S., Europe and Japan - I think the level of demand that we have seen in 2006 and 2007, we will never see again there may be some zigzags up and down but as a trend I think it will be a downward trend in terms of oil consumption."

Reuters says that flat or declining OECD demand may ease any strain on oil prices caused by ever-growing consumption in emerging economies. The Organization for Economic Co-operation and Development (OECD) countries will account for 53% of world demand in 2010, the IEA says. In its Jan. 15 monthly Oil Market Report, the IEA forecast OECD demand would average 45.48 million barrels per day (bpd) in 2010, unchanged from 2009. World demand is forecast at 86.33 million bpd, up from 84.89 million in 2009.Mr. Birol said the economic crisis had played a role in curbing OECD demand but the main reasons were more efficient cars and the increasing use of electricity and gas instead of oil in areas outside transport. "It did play a role. The recession had a one-off effect," said Mr. Birol, who spoke from the sidelines of the Davos conference of business leaders. "But the main factors are structural." BP PLC chief executive Tony Hayward, also in Davos, said on Thursday demand for gasoline would not return to the rate of three years ago in established markets. "None of us will sell more gasoline than we sold in 2007," he said, referring to developed markets. "That's, however, being offset by very strong ... markets of the East and particularly China."

In China, 13 million cars were sold last year, he said. Interest in peak demand has grown following the surge in oil prices to a record high near US $150.00 a barrel in 2008, a decline in world demand because of the economic crisis and efforts to combat climate change. Reuters reported a year ago, citing analysts including the former chief economist at BP, that oil demand may never return to growth in the United States, Europe and parts of Asia. While non-OECD demand is expected to keep world oil use on a growing trend, some observers contend global consumption could reach a high point in the next decades as a result of policies to tackle climate change.

Peak demand, nuclear power and drill time! Is President Obama serious about expanding oil and gas drilling here in the US? Is he serious about opening the door to nuclear power? The most practical answers to our energy problems are at least getting some consideration and will meet with Republicans to discuss this but if Obama forces a climate bill to come with it, we still may be dead on arrival. Still if he gives up on pushing cap and trade and moves towards nuclear power and natural gas drilling, it may be the most significant step towards reducing green house gas emissions from the US ever. 

Something to watch: Dow Jones reports that The U.S. Senate late Thursday passed a new sanctions law against Iran and the companies that do business with the country in a bid to ratchet up pressure on Tehran to halt its nuclear enrichment program. Although it covers a broader swath of the economy than just the energy sector, the bill particularly aims to cut Iran's gasoline imports by penalizing the firms that supply the country with up to 40% of its refined petroleum needs.  

What do Al Gore and Osama bin Laden have in common? Well they both blame industrialized nations for the climate. It seems says bin Laden is calling for a boycott of the dollar because he is so mad at what is happening to the planet. I am sure he has been spending his time in hiding looking for ways to make an environmentally friendly weapon of mass destruction to wipe out the infidels and will not harm the planet.

Get ready for the weekend by watching me on the Fox Business network! Also sign up for the latest trades by emailing me at pflynn@pfgbest.com or call me at 800-935-6487 to open your account.

You Don’t Say.

Sometimes is not about what you say, it's about what you do not say. In the big Fed statement yesterday, one lone rouge inflation hawk dared to stand up and say, Hey guys, it is our job to worry about inflation. The lack of a comment about the housing market left traders wondering whether it was a glaring omission or perhaps it was an admission to the fact that the Fed is under a lot of political pressure. The Fed also changed their wording on inflation prospects from inflation would remained subdued for some time to it "likely" would remained subdued.

Ah yes, the changing face of politics where everything remains the same. Obama tried to move to the right though overall, at times he seemed a bit contradictory. Obama tried to reach out to the energy sector by embracing drill, drill, drill, nuclear power and clean coal technology as long as we at same time have a lot of money for “big green”. Oh yes you have to take care of the "big green” lobby as they spent millions to put him in office and they expect billions of green dollars back in return.  And don’t forget he also said he would repeal "tax breaks” for oil companies and give tax breaks to big green. The Robin Hood energy plan: take from the rich and then run the energy companies and then give their money to the poor inefficient green energy companies.

Beyond the Fed and Obama, oil just could not seem to shake off pathetically weak demand. The EIA showed, as I basically predicted, that crude supplies fell because of fog down in the Gulf which drove crude to a one month low. Commercial crude oil inventories fell by 3.9 million barrels from the previous week. That still puts supply at 326.7 million barrels, U.S. crude oil inventories are just above the upper limit of the average range for this time of year. Total motor gasoline inventories increased by 2.0 million barrels last week, and are above the upper limit of the average range. Distillate fuel inventories increased by 0.4 million barrels, and are above the upper boundary of the average range for this time of year. As for demand, it was reported that total products supplied over the last four-week period has averaged 18.8 million barrels per day, down by 2.0 percent compared to the similar period last year. Over the last four weeks, motor gasoline demand has averaged 8.7 million barrels per day, down by 0.8 percent from the same period last year. Distillate fuel demand has averaged 3.7 million barrels per day over the last four weeks, down by 8.1 percent from the same period last year. Jet fuel demand is 1.5 percent higher over the last four weeks compared to the same four-week period last year.

Bottom line: with weak demand and plentiful supply this complex is the definition of bearish. There has been a lot of market talk that oil stored in tankers is again raising dramatically. We have the highest forward demand cover for gasoline since 2002. Bottom line: there was nothing that happened yesterday that changes my longer term bearish outlook. Long term look for oil to go to the 40 handle. We will see swings along the way so call me for the latest at 800-935-6487 or email me at pflynn@pfgbest.com to open your account and make sure you are getting the best most entertaining business news on The Fox Business Network where you can see me every day! 

We got to get out of this place, if it’s the last thing we ever do. It looked like we were getting so close to the exit just when you think you should be getting there suddenly it is further away. Or it disappears completely leading one to wonder whether it was ever there at all. It is the Fed day mirage with no exit strategy in sight that will leave energy traders on pins and needles. Oh sure we will get the latest data from the Department of Energy on supply and demand, but let’s face it, it may be all secondary if we get any surprises from the Fed.

Ben Bernanke of course has been under fire, so politically it may be the equivalent of giving his pink slip if he encourages some rash action. At the same time, the politicians at that point might rise up and either abolish or take over the Fed so the likelihood of anything crazy would be downright crazy. That does not mean that can’t affect the oil as the market’s reaction or non-reaction to the meeting will put the focus back on inventories.  

What could be interesting after the Fed, are the exchange rates between various currencies and the dollar. With the Chinese government reigning in the banks and problems with the PIGS (Portugal, Ireland, Greece and Spa) which all seem to be in deep economic trouble in the eurozone. Sure the growing concerns about tightening in China makes the always exciting Fed meeting a little bit more exciting and all the side stories with the Bernanke confirmation and Geithner perhaps withholding information on the AIG bailout adds to the fun.

Yet before we get to that we get weekly energy inventories. If last night’s American Petroleum Institute report is any indication, we might find out that our oil supply is lost in the fog. The API reported that US crude stocks fell by 2.2 million barrels. The API showed that Distillate stocks fell 2 million barrels and gas up 91600 barrels. Imports were down by 1.5 million barrels a day so do not get all excited thinking that perhaps this was a demand driven drawdown. No, it is about fog and next week it may be about the oil spill so the numbers are not going to tell us as much as we would like. They will be a bit messy until we can get all the mess cleaned up.

We have been telling you that we are bearish on oil. Long term we are looking for a move down into the forties. This may be a great time to put on option strategies whether or not you agree with that assessment, you can call me or email me to get the latest day trade numbers and you can see me each day on the Fox Business Network. I will be  there for the Fed Decision so tune in. You should also contact me to find out all the great products that PFGBest has to offer. Just call me at 800-935-6487 or email me at pflynn@pfgbest.com.

If the Chinese banks have problems and dramatically slow lending, can the oil bull market continue? How about the carry trade? Concerns are mounting around the banks, raising the question as to whether the China commodity consuming gravy train will continue at the previous rapid pace. Overnight these concerns are coming to the forefront as Chinas fourth largest is looking to raise 40 billion yuan or the equivalent of $5.86 billion dollars to shore up its capital base and maintain its lending capacity.

Last week I said that in the beginning of the year many Chinese lending institutions went on a massive lending spree, seemingly lending money to anything that moved. It is possible that these intuitions were either driven by greed or the realization that they knew that soon the Chinese government would raise rates and stop the lending party. Bloomberg News reported that the Chairman of the China Banking Regulatory Commission said that loans in China were “relatively high”. He said that some banks were asked to stop lending because they failed to meet reserve requirements. Obviously the failure to meet these requirements and the Chinese government dramatically moving to reign in credit, means that many lending institutions in China are trying to lend every penny they have available to them. We'll see if there is a global double dip in the economy. It is possible that these intuitions could have some problems.

Now the China bank 6 year bond issuance is subject to the approval of bond holders but raise the larger issue how the markets are going to handle the removal of stimulus. Or what is more, how will the world handle a China whose growth may not be all it is cracked up to be.

Long term we still feel oil is on a long term journey near $40 a barrel. Today March crude oil has strong support near the 7400 handle with resistance near 7700. We should see some swings this week ahead of the Fed meeting. Get ready to sign up for trading from the Trade strategist by calling me at 800-935-6487 or by emailing me at pflynn@pfgbest.com. And also check me out each day on the Fox Business Network. 

In the beginning of the year many Chinese lending institutions went on a massive lending spree, seemingly lending money to anything that moved. It is possible that these intuitions were either driven by greed or the realization that they knew that soon the Chinese government would raise rates and stop the lending party. Bloomberg News reported that the Chairman of the China Banking Regulatory Commission said that loans in China were “relatively high”. He said that some banks were asked to stop lending because they failed to meet reserve requirements. 

Obviously the failure to meet these requirements and the Chinese government dramatically moving to reign in credit means that many lending institutions in China are trying to lend every penny they have available to them and if we see a global double dip in the economy, it is possible that these intuitions could have some problems. Or then again maybe not. Still it was another reason that the markets fascination with China and the carry trade may be in jeopardy.

Yesterday we saw a flight to the dollar and the China news, along with the continuing saga with Greece and the EU, saw safe haven buying in the dollar and the treasuries. The euro took out some key support which put pressure on the price of oil. Dollar strength and the worries about whether the market place has been too bullish on China and their banking issues is one of the reasons that petroleum was able to shrug off what was a very bullish weekly American Petroleum Institute inventory report. All right, maybe it was a little cold after all. The API reported that distillate inventories dropped by 3.38 million barrels the bulk of which was heating oil. Market expectations were lifted upward by last week’s supply distillate build only to be reminded that when it comes to distillate supply cold obviously still matters. Crude supplies also increased which means traders will be on guard for a bullish DOE report.

Exxon was in front of Congress defending fracturing and their acquisition of XTO. The Wall street Journal wrote a great piece on all of those issues today. The Journal writes that, “a mounting backlash against a technique used in natural-gas drilling is threatening to slow development of the huge gas fields that some hope will reduce U.S. dependence on foreign oil and polluting coal. The U.S. energy industry says there is enough untapped domestic natural gas to last a century, but getting to that gas requires injecting millions of gallons of water into the ground to crack open the dense rocks holding the deposits. The process, known as hydraulic fracturing, has turned gas deposits in shale formations into an energy bonanza. The industry's success has triggered increasing debate over whether the drilling process could pollute freshwater supplies. Federal and state authorities are considering action that could regulate hydraulic fracturing, potentially making drilling less profitable and giving companies less reason to tap into this ample supply of natural gas. Exxon Mobil Corp. placed itself squarely in the middle of the wrangling when it agreed last month to acquire gas producer XTO Energy Inc., a fracturing pioneer, in a deal now valued at $29 billion. Wary of the rising outcry, Exxon negotiated the right to back out of its deal if Congress passes a law to make hydraulic fracturing illegal or "commercially impracticable." A must read in today’s Journal!

Long term we still feel oil is headed down to near $40 a barrel. We see choppy ranges along the way. Make sure you call to get the latest entry and exit points. All you have to do is pick up the phone and call 800-935-6487 or email me at pflynn@pfgbest.com to open your account. Make sure you get the best and most entertaining business news on the Fox Business Network!

Ready to break or is it hit the brakes?

Can the oil bulls catch a break as the as the Senate Super Majority is broken? Well maybe they might have if it weren’t for the fact that China is hitting the brakes.    

The election in Massachusetts gave oil bulls a thrill but news today out of China may change that bullish mood. The petroleum market reversed course yesterday as the market correctly predicted that Republican Scott Brown would pull off an upset victory in the Massachusetts special Senate campaign to fill Senator Ted Kennedy’s vacant seat. Or as Senate elect Brown would say “The people’s seat”. The man who will block the Democrats super majority and vote against the universal health care bill sent healthcare stocks soaring helping inspire the Dow on to 115.78 point rally turning oil around on its coattails. Yet today we may see the oil market come back down to earth as reports out of China may once again zap that bullish momentum.

Just when the oil bulls thought they might catch a break, China put the squeeze on. Reuter’s News reported that the Chinese government has told several major Chinese banks to hit the brakes by making them increase their reserve requirement ratio by half a percentage point. Not only that they told these lending institutions to stop lending money for the rest of this month. Reuters News reports that lenders Citi Bank, ICBC and Everbright Bank were all informed by the authorities to cease lending in another sign that China is trying to stop that China bubble from expanding. This is the type of news that should leave big skid marks on the backs of the oil bulls. Or perhaps a better way to say it is that this news should strike fear in the heart of the oil bulls the same way last night’s election results should strike fear into the hearts of incumbent Democrats.

Adding to the bearish momentum is reports out of OPEC that they just cannot give up their cheating ways and what is more they admit it. OPEC compliance fell to 56 percent, from 58 percent in November. 

Bad news in the refining business as Chevron reports they will lay off workers as demand for oil products continue to squeeze refining margins. They are going to restructure their refining end making it leaner and possibly selling or closing refineries.

We feel that the overall the oil market is headed down to the$40 a barrel handle over the next few months but at the same time you have to be careful and respect the wide daily trading ranges. Yesterday’s action was a perfect example of what I am talking about. Long term players can sell rallies and have a stop above $85 if you want to play for the larger move but why not look at the ranges as well. Call me for the latest entries and exits at 800-935-6487 or email me at pflynn@pfgbest.com to open your account. Also tune in to see me each day on the Fox Business Network.

You lost that bullish feeling, lost the bullish feeling. You’ve lost that bullish feeling now it’s gone, gone, gone.

The petroleum complex lost that bullish feeling failing to build upon that cold weather inspired bullish promise. After starting the year like a bullish gangbuster the oil markets seem to be coming back to earth as the supply side just gets harder to ignore. Crude ended last week on a 5 day losing streak as US inventories increased and the International Energy Agency added to the building bearish momentum and the key area for oil to take out is the 7700 a barrel range. Now the March contract has the bulk of the open interest and the market seems to fail to take out major support point during these roll over periods but the clock seems to be running out on the oil bulls.

Let’s face it, if you are very bullish what are your bullish arguments? The best one is China demand growth. Yet since China seemed to take steps to slow the economy by raising reserve requirements on their banks, that seemed to take some of the sting out of your best bullish argument. Yet overnight the Wall Street Journal reported that the Chinese Premier Wen Jiabao said that the [Chinese] government plans to maintain "reasonable and ample" money and credit supply in the first quarter, signaling it is unlikely to adopt drastic tightening measures before the domestic economy recovers further. Those comments seemed to give oil a bit of a bounce after testing the $77 a barrel range.

Mr. Wen also said Beijing aims to curb speculative property purchases as part of efforts to promote a healthy and stable development of the domestic property market. Wow, why didn’t Barney Frank think of that? He also said that China's government will take steps to ease energy supply bottlenecks in the first quarter and stabilize agricultural product price rises. Agricultural prices rises. Is that not inflation? Oops, I forgot to exclude food and energy.

The other bullish argument is that the recovering economy will reinvigorate demand. In some ways according to the International Monetary Fund the global economy is recovering in China and the developing world faster than expected but still raises caution. Bloomberg News reports that International Monetary Fund Managing Director Dominique Strauss-Kahn said it’s too early for policy makers to withdraw stimulus that’s driving the global recovery. The global economy is recovering, even if its recovery is fragile. A plan to withdraw emergency measures, “should be designed today” yet not “implemented” because world economies are still dependent on government support and private demand remains weak. Bloomberg said that Strauss-Kahn had said earlier this month that the world’s economic recovery is occurring “sooner and stronger” than anticipated. Government measures, “should be focused more on what is likely to fight unemployment.” He said that countries haven’t done enough to tighten regulation in the wake of the global financial crisis. “The root of the crisis” was “a failing of regulation and supervision of the financial sector in the U.S,” he said. “A lot has already been done, but it’s not enough.”

As it turned out the long awaited proposal from the CFTC on proposed position limits report from the CFTC was not as bad as some had feared. Instead of the CFTC putting in hard limits they tried to be inventive with position limits that are flexible based on open interest as opposed to a hard and fast number which eased some concerns. The rules should impact only a few players and in some cases the limits will be larger than the limits that the CME group now has in place. The CFTC says that if the proposed limits had been in place over the last two years only 23 traders would have reached the limits and only 7 of these would have been forced to reduce their positions.

Still some on the commission are still rightly concerned that these proposals may do more harm than good.  Commissioner Jill Sommers said she had several concerns especially the fact that the agency doesn't have authority from Congress to apply uniform position-limit rules to the over-the-counter market. She is concerned that forging ahead with federal limits in a piecemeal fashion is unwise. Others such as Commissioner Michael Dunn warned that the proposals could have unintended consequences perhaps damaging the markets leading to less transparency and driving trading overseas. The bottom line is that regulation of the energy markets are a good thing just like a referee is a good thing in a football game. Yet overregulation could harm the market place and ultimately harm energy consumers. These proposals need to be looked at more carefully before the CFTC overreacts to problem that really does not exist.

Don’t forget that due to the Martin Luther King day holiday the weekly petroleum status report from the Energy Information Agency will be released on Thursday, January 21, 2010 at 10:00 A.M. (Central Time) due to the closure of the Federal government. Also do not forget to get all your business news on the Fox Business Network. Feel free to contact me anytime at 800-935-6487 or email me at pflynn@pfgbest.com. Make sure you sign up for my trade updates or call me for a personal recommendation. The new delivery system for the trade recommendations is taking longer than I anticipated so email or call me for the latest and to open your account. It is easy to do if you have a phone. Just call me at 800-935-6487 or email me at pflynn@pfgbest.com. Find out also all about the many services that PFGBest can offer. You might be amazed! Metals, stocks, platforms!   

The Energy Report Thursday, January 14, 2010

Demand is back and we are going to be in trouble, hey la de da demand is back. All right based on the Department of Energy it is clear that demand is far from being back in the US but just you wait according to Goldman Sachs as they say that demand is going to be back to pre-recession levels by the third quarter of this year. What?? That is right. Peak demand fears may give way back to peak oil fears as Goldman says that strong demand from emerging markets will increasingly offset the lagging recovery in OECD demand. Are they right?

Goldman Sachs analysts Arjun Murti, Kevin Koh and Michele Della Vigna, authors of the “Super Spike”, say the fact that the increase in Chinese oil imports has exceeded the decline in US oil imports seem to support their conclusion that demand will return to those lofty unquenchable levels. China this week reported that oil exports rose by 1.6 million barrels per day which exceeded the drop of US imports of 1.5 million barrels per day.

Yet the question is whether or not we see this continue in a straight line. We have already seen China raise reserve requirements on banks to slow speculative growth. China has also been storing oil. The speed of demand growth will also be slowed by more efficiencies and energy alternatives so I think that it may be years before we get back to global demand levels. On the other hand, if Chinese growth continues in a straight line the way it has, it is possible that Goldman may be right. And if that happens at that point it would be in an expanded bubble.

When Goldman came out in 2005 with their $100 a barrel prediction there was no doubt they were right on. I agreed with their call at the time as long term readers of “The Energy Report” (the original, accept no Johnny come lately) know that we had held a very bullish long term outlook from 1999. We held at that time and did for almost the entire decade, that demand from China would drive the price of oil. Believe it or not that was not a popular view as the markets fascination with dot com’s and memories of the Asian financial crisis raised skepticism that China could sustain an oil consumption marathon or even a sprint. In the “year ahead” surveys during those years my price projections were always the highest or at the high end of all the firms on the street. We embraced the Goldman call in 2005 and kept pretty much in agreement with Goldman until last year when they were saying that oil could go as high as $200 a barrel. Obviously we felt at that time that the financial crisis created an unnatural price for oil that ultimately could not be sustained. That proved to be correct as global demand had the largest drop in history eventually created the largest peak to valley drop in the history of Nymex oil trading.

Not to take away anything from Goldman for their correct calls, but I feel that they are wrong on this one. I do not feel that this stimulus fueled oil demand surge will go in a straight line. In fact once again I feel that this China demand trajectory is unsustainable and will be slowed by the Chinese government. Demand growth in the US and other countries will be slowed by alternatives. The record US corn crop bodes well for the ethanol market and we may see a move globally for the use of what will be cheaper ethanol. The other factor will be raising interest rates that should also temper global demand. The ECB is not expected to raise rates but comments about the outlook and how the ECB plans to extract itself from extraordinary liquidity measures may move oil. Watch the dollar and listen to Jean-Claude Trichet just in case he says something crazy. We might want a little crazy!

Check me out today and everyday on the Fox Business Network! Make sure you sign up for my trade updates or call me for a personal recommendation. The new delivery system for the trade recommendations is taking longer than I anticipated so email or call me for the latest. Just call me at 800-935-6487 or email me at pflynn@pfgbest.com to open your account. Find out also all about the many services that PFGBest can offer. You might be amazed! Metals, stocks, platforms!   

Phil Flynn

Senior Market Analyst

800-935-6487

312-563-8344

pflynn@pfgbest.com

Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. PFGBestofficers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

Oil bulls have a bad day.

For the oil bulls it was just one of those days. Bad earnings from Alcoa set the stage for a weak commodity trade.  Oil just could not get over the fact that the Chinese government told the Chinese banks that they would have to raise their reserve requirements, essentially taking back liquidity from the Chinese growth machine. When oil bulls try to justify the global glut of global supply, it is the growth in China mantra that they repeat over and over. That droning murmur may soften a bit as China seems to be ready to let some air out of its expanding bubble. This week’s data that showed China’s Imports hit a record high seemed to be a signal to the Chinese governments that they have to start putting on the breaks before inflation starts spinning out of control. 

As bearish as that was it only played a part in the larger commodity melt down. Precious and industrial metals took it on the chin and a stunningly bearish crop report especially in corn helped seal the markets fate. Even the Short Term Energy Outlook released by the Department of Energy seemed to play into the bearish market mood when they lowered their US demand expectations. Yet the most bearish thing oil saw was after the close with the release of the API (American Petroleum Institute) report.

You can forget all about that cold weather stuff and all the demand that it was supposed to bring because after the API report, it was like it never happened. The API reported that distillate supplies actually increased by a whopping 3.60 million. That was not supposed to happen as global cooling was supposed to zap supply. That was a mere bag of shells when you compare it a 6.82 million barrel build in gasoline supply. A number so stunning that despite predictions by The Department of Energy it is possible that we won’t see $3.00 gasoline after all! Now top that off with a 1.2 million barrel in crude supply and you have got a total bearish smack down.

What the heck is going on at the API? Will the DOE come close to confirming this week's bear town blitz? Is it possible that imports that had been stymied by weather down in the gulf region are finally hitting our shores? The answer in part is yes. Refinery runs did increase to 79.8 percent from 79.5% but that is not exactly increase that would normally lead to this surge of supply. The API showed that crude imports surged. The API reported that crude imports leapt to 9.729 million barrels per day from 8734 million barrels a day. Yet at the same time they say that product imports fell which would not add up unless demand was really bad.

Another sign that oil was at a top is when Kuwait's oil minister, Sheikh Ahmad al-Abdullah said that the price of oil is "fantastic". Anything that “fantastic” can’t last.

Oil is in the process of putting in a long term complex top. The problem is that it may take many months for it to complete. It seems like the market is in to more complex trading ranges with an upper band and a lower band and it seems to be on a longer term journey to at some point test the $85 a barrel area. Yet every time if fails, it seems to push us back in a lower range in the $70 a barrel area. If we close below $80 today, it will put us in the lower range and we could see oil get as low as $70. If we closed above $80 the market will try perhaps in vain to test what the bulls feel is it’s $85 a barrel destiny. In other words range trading will still be in our future it is just a question of whether it will be in the upper range or lower range. Long term I feel this market will head lower with a longer term test into the lower $40s. Yet we have to play the ranges until every last bull realizes that, it is unlikely we can go above $85. If you have the patience and the confidence you can sell a rally and risk a close above $85 for a long term move to $44 but in the meantime get ready for a long and bumpy ride. Of course when the market finishes its topsy turvy gyrations, get ready for it to break quick. In the meantime you might as well sit back and enjoy the range!

What you might really enjoy is watching me and the latest developments on the Fox Business Network where you can see me each day! Also sign up for my daily email blast and to get set up on our soon to be released trade updates. All you have to do is call me at 800-35-6487 or email me at pflynn@pfgbest.com to open your account.

When bullish is not just bullish enough.

Oil looked a bit tired to start the week, unable to build on early gains inspired by a weekend of what should have been exceptionally bullish news. Whether it was the strong economic data out of China or the increasing tensions around the globe with regards to Nigeria and Iran, or the ongoing oil price dispute between Russia and Belarus, the bulls should have continued to have their way with this market the way they had the week before. Of course when a market fails to rally on bullish news it means more than likely the bulk of the news was priced in or in this case perhaps overpriced in. Traders anticipated that the nasty cold had played a big part in pumping up the price of oil. This weekend was the weekend that was supposed to be the beginning of the new ice age, so some traders might have been shocked that temperatures could actually go up. Or maybe they are just be reminded that despite the cold and the strong demand out of China the globe still has ample supply.

As for the Russia and Belarus situation, Dow Jones reports that Russian oil supplies are continuing to and via Belarus to Europe despite the two countries' failure to sign an agreement for 2010, Belarus' state energy firm, Belneftekhim, said Monday, according to the RIA Novosti news agency.  The market is also raising questions about the data out of China and in a sense it was priced in as oil went on that relentless rally. The bottom line is that the market action was not what the bulls had hoped for.

Peak Freaks worried about peak oil, as opposed to peak demand, may find one more reason to rest at least a little easier. For the first time in seven years production at Pemex Oil in Mexico may actually rise. Bloomberg News reports that Petroleos Mexicanos, the state-owned oil company, may produce more crude in 2011 as new discoveries come on line, arresting seven years of plunging output. The company says it may produce 2.55 million barrels a day next year, up 50,000 barrels from 2009. What is more, the company plans to increase output to near 2.69 million barrels a day in 2010. Bloomberg says that Pemex pumped 2.602 million barrels a day through November 2009. Pemex output entered its seventh year of declines this month, as the company aims to find new deposits and bring discoveries online to replace aging fields. Pemex Chief Executive Officer Juan Jose Suarez Coppel has said the company may pump 2.5 million barrels of oil a day in 2010. The company expects to add production from new fields that are part of its Crudo Ligero Marino project as well as fields in the Campeche sound, the location of Cantarell, the world’s third-largest field when it was discovered in the 1970s. Production at the $11.1 million Chicontepec onshore field and additional onshore projects may also climb next year. Cantarell accounted for about two-thirds of the oil Mexico produced at the peak of production in December 2003, fell by 35 percent in November from the year-earlier period. The production declines cost Pemex about 300 billion pesos ($23.4 billion) in lost sales last year. This forced Mexico’s government, which relies on oil revenue to fund about a third of its budget, to raise taxes to narrow the widest budget deficit in bout 20 years.

London-based BP Plc may surpass Pemex this year to become the third-largest producer of crude oil in the world, based on data compiled by Bloomberg. Pemex and BP rank third and fourth in world crude oil production, respectively, the data shows. Saudi Aramco is the world’s largest oil producer followed by the National Iranian Oil Co.  Pemex’s natural-gas production may fall to 6.1 billion cubic feet a day in 2011 and 6.25 billion cubic feet in 2012, Morales said in the presentation. Pemex extracted 7.045 billion cubic feet of gas through November.

Attention loyal Energy Report readers. You will have to sign up to get trading recommendations. This will allow us to put on more complex trades and in the future we have plans to deliver the trades in am more timely manner  and include intraday updates. While we are going through this transition I ask that you email me or call me for trade updates. We will shortly have a way for you to get logged on for the trades. Just call me at 800-935-6487 or email me at pflynn@pfgbest.com. Get with the program by checking me out every day on the Fox Business Network! 

You take the oil in and you send the goods, out you take the oil in and you shake it all about. That’s what it’s all about. Last week it was all about the Fed and unemployment.  Who is the largest exporter of goods in the in the world?  If you said Germany, you would have been right last week. China lays claim to the title of world’s largest exporter this week. And this comes against a back drop of record crude imports hitting a 21.26 tons in December, setting the stage for an early energy rally. Now add to that the fact that the Nigerian Rebels are back at it and rising tensions surround Iran and it is a good morning to buy oil. Still, despite the breakout and the buy happy Monday morning attitude and the frosty global temperatures, oil is coming into some major resistance up around the $85 a barrel area.

Buy anything from China lately? China's exports rose 17.7% in December hitting a whopping $130.7 billion during the month, bringing the full-year export figure to $1.20 trillion. Yet at the same time China’s growth being fed by a steady dose of government spending saw its budget surplus get squeezed.  Despite these impressive numbers, it may cause some issues down the road. The pressure on China to allow their currency to float as the peg, gives them an unfair trade advantage over its competitors. China’s government may fear a bit of a bubble as the surge in activity could cause some imbalances.

Those Nigerian rebels are back. Over the weekend Chevron Corp was hit by the rebels shutting down some production in Nigeria's Niger Delta. This is the first successful sabotage since a militant ceasefire last summer. There were reports of shots fired as early as this morning.

Will there be sanctions on Iran? There are growing signs that they may be closer to happening. Dow Jones reported that Swill commodities trader Glenore has cut off gas supplies to Iran. That comes after General Petraeus said it would be irresponsible to not consider military action and making plans for a whole variety of different contingencies. He also said that Iran's nuclear facilities are not bomb-proof and would not comment about rumors Israel may launch a strike against them. Iran's President Mahmoud Ahmadinejad said on further U.N. Security Council sanction will not make Iran back off one iota from pursuing its nuclear program.

Attention loyal Energy Report Readers.  You will have to sign up to get trading recommendations. This will allow us to put on more complex trades and in the near future we have plans to deliver the trades in am more timely manner and include intraday updates. While we are going through this transition I ask that you email me or call me for trade updates. We will shortly have a way for you to get logged on for the trades. Just call me at 800-935-6487 or email me at pflynn@pfgbest.com to open your account. And get with the program by checking me out every day on the Fox Business Network!