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The Energy Report

by Phil Flynn
Thursday, March 3, 2005
Brought to you by Alaron Research

Any hopes of an OPEC production hike were put on ice after yesterday's weekly stocks reports from the Department of Energy and the API. Crude oil posted a better than expected increase from the DOE of 2.40 million barrels and the API reported an increase of 3.29 MB. It gave OPEC a twisted justification for keeping output steady. In OPEC's mind, the recent run up in price is all weather related and not supply related so a crude oil production increase might not solve the problem.

In fact it seems that right now OPEC wants to establish a temporary floor for oil at $50.00 per barrel. As long as oil is above $50.00 it appears OPEC is in a happy mood. The market realizes this and despite the rise in crude stocks, there was no selling in crude because traders know that the more oil we had in this report the less we'll get from OPEC.

Records are meant to be broken yet yesterday's record high in unleaded gas should come with an asterisk. I'm not saying unleaded is on steroids but a record high that isn't a new contract high is a record high all the same. If you watched the front month continuation chart yesterday, the high in unleaded was an all time high for a front month. Yet the April contract that's being actively traded now posted a high trade of 15120 last October. Whether you consider this a new high or not it won't give you any comfort when you fill your tank.

Why did the unleaded run to such an unprecedented level?

There were many reasons. We had 3 different refinery snags. We had a surprise draw of approximately 3.90 million barrels according to the API. And probably most significantly, we had spreads unwinding. The long heating oil and short unleaded spreads were being liquidated as traders ran for the exits. Traders now realize this spread that has made an unbelievable move in the past few weeks will now probably start to come in line.

The other big bullish factor for unleaded was the substantial drop in refinery runs. We know this has to happen as refineries are retooled and maintained and coming through record runs nearly all winter long to keep up with heating oil demand there is work to be done. The inevitable is now looking scary! Maintenance could further squeeze supply of products at a time when we are seeing the coldest stretch of winter this season.

Even though we remain in the depths of winter, I want to make a prediction. When you start thinking about those lazy, crazy days of summer also start to think about another investigation on why gas prices are so high and rising. This is of course as much a sign of summer as road construction! Yet this year it will be even more heated and interesting if what the Wall Street Journal is reporting comes to pass. They are saying Chevron Texaco is looking to make a bid for Unocal. I can almost hear the whining coming from Congress! Yet we know if the giant oil major doesn't jump on this China will. In fact what inspired Chevron to make a bid was earlier this year China National Offshore Oil Corporation had shown an interest in acquiring Unocal. They have some nice reserves and a patent on the federally mandated process for summertime blends of gasoline. Others may join the party to try to buy the company and let's hope it stays in the hands of a US company. We'll probably have a government investigation and they'll be a lot of whining but what's summer without it?

Today we'll get the supply numbers from the Department of Energy on natural gas and maybe this will bring us back to earth. Will the recent cold snap give us a surprise draw down? The whole complex could get a boost if we do. We'll see a draw of perhaps 120 bcf. Stay tuned.

Ready to get involved?

Then call me at 800-935-6487 and ask for Phil Flynn to open your account. You can also get a free trial of Alaron Energies. See me tomorrow morning on Bloomberg News for the employment report and again at 2pm central for the bond market wrap up.

Buy April crude 5150 - stop 5090.

We're long April heating oil from apprx 14100 - raise stop to 14800!!!

Stopped on short April unleaded from apprx 14400 at apprx 14200!!! Sell April unleaded at 15000 - stop 15100.

Buy April natural gas at 660 - stop 655.

Have a GREAT day!

Phil Flynn
March 3rd, 2005

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Phil Flynn is Vice President, Energy Analyst and General Market Analyst with Alaron Trading Corporation (www.alaron.com). 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.

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