The Energy Report for Thursday, May 27, 2010

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By Phil Flynn | May 28, 2010 4:35 AM EST

The Audacity of Hope.

If the economy bounces back and the Chinese hang onto their Euros, can oil bulls find love and happiness in this world of economic turmoil? The audacity of hope once again has crept back into the oil market. A string of strong macroeconomic numbers that blew away market expectations, as well as some strong oil demand numbers, has the marketplace trying to forget all about the fears of a global economic meltdown that has engulfed the market. For today all the subplots have been put aside for the moment as the market now wants to bask in the economic silver linings of the moment.

You know you are going to have a good day when you get a report that shows refinancings are rising and housing sales of new homes surged 14.8%. Add to that a strong durable goods number that gained 2.9 percent in April, the fourth boost in the last five months, and somehow the world is not so scary. Oh sure the Europeans have problems as evidenced by rumors that the Chinese were looking to divest themselves from Euros and it seems that the world's largest oil consumer, the USA, might lead the oil market out of its recent darkness.

That mood was further cemented when the Energy Information Agency released a report that showed some stellar oil demand numbers. Despite the fact that the EIA reported that US commercial crude oil inventories increased by 2.4 million barrels from the previous week, they also reported that the string of increases at the key delivery pinpoint Cushing, Oklahoma actually fell from its record high. Along with that the EIA reported demand numbers that seemed to indicate some improving underlying economic activity. The EIA reported that refiners supplied the market with 19.5 million barrels of various oil products with was up an impassive 6.9% from a year ago. Not only that, based on EIA calculations, gasoline demand came in at a hefty 9.2 million barrels a day which was up 1.2 percent from a year ago which is almost getting back to normal year over year demand growth. Distillate fuel demand has averaged 4.0 million barrels per day and is up by 15.8 percent from the same period last year. Jet fuel demand was reported 7.3percent then last year. And with predictions of strong holiday demand ahead, the market tried to forget about Europe and the overhang of heavy supply.

That might be because the International Energy Agency predicted the end of the era of cheap oil again and some strong forecasts for economic growth from the Organization for Economic Cooperation and Development. The OECD said, "the global economy is recovering faster than expected from recession with Asia leading the way, but it is at risk from huge debts in developed countries and possible overheating in countries such as China." Reuter's news reported in a twice-yearly report, the Paris-based Organization for Economic Co-operation and Development raised its forecast for global growth to 4.6 percent in 2010 and 4.5 percent in 2011. Last November it predicted growth of 3.4 percent this year and 3.7 percent in 2011, after a 0.9 percent contraction in 2009.It was also far more optimistic about job markets globally, saying unemployment in its 31 member countries may have peaked at around 8.5 percent -- much lower than its previous prediction of almost 10 percent.

The International Energy Agency also stirred up fears of the long term outlook on oil. The IEA said the era of cheap oil is over. I think they need some new writers because they said that when oil was over $100.00 too. Dow Jones reports that, "The era of cheap oil is over and a combination of underinvestment in production and a faster-than-expected recovery could push prices high, the Chief Economist of the International Energy Agency said. "The era of cheap oil is over. We have to get used to higher oil prices even if there is no crisis or crunch," Fatih Birol said at the annual forum of the Organization for Economic Co-operation and Development in Paris. Birol said that oil production in non-Organization of Petroleum Exporting Countries is reaching a peak and the bulk of oil predication growth will have to come from a few countries in the Middle East. If there is a lack of investment in production and a stronger-than-expected economic recovery in such oil demand centers as China, India and the Middle East, prices will rise significantly, Birol said. "If these two marry in two years' time--strong real demand growth and lack of investment in production--in 2013, 2014 we may well see higher prices than we have seen in the recent past," he said. If oil prices did get very high, the still-fragile economic recovery would face the risk of being strangled, he added. "Oil was at $87 a couple of weeks ago. It may go beyond that...depending on how strong the economy will recover and how the insufficient investment in oil upstream will contribute," he said on the sidelines of the conference. Recent declines in the oil price reflected the weakness of the economy and economic expectations, especially in the euro zone, Birol said. A recovery in prices will depend largely on what happens on the economic front, he said.

 Yet I have a question. If the economy gets strangled by high oil prices won't prices come back down again?
We think that oil prices have more to fall long term but short term we may have found a bottom. Oil bulls will try to establish a new bottom to the trading range. Still the market will be guided by the perception of the strength of the global economic recovery. The greatest fear the bulls have is fear itself. If we see the VIX rise the oil will fall. We have seen some wide ranges so make sure you are getting our latest trade updates by calling me at 800-935-6487 or emailing me at pflynn@pfgbest.com  to open your account. Do you want to see me every day? Of course you do! Tune in to the Fox Business Network where youy'll see me every day!

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