THE ENERGY REPORT
Wednesday, September 27, 2006
By Phil Flynn
The Energy Report Tuesday, September 26, 2006
The first cut is the deepest, baby you know, and OPEC may be ready to take that first cut. Oil prices once again spent a little time below $60 a barrel only to come roaring back on OPEC comments. As the oil market bears realize that with weak seasonal demand and high inventories the only thing that the market has to fear is OPEC itself. And OPEC played into those fears by dropping hints that this recent drop in price is not satisfactory. Dow Jones reported that OPEC president Edmond Daukoru (the same guy who said last week that because of the Thunder Horse delays the pressure to cut production in the near term was less likely, said yesterday that he was 'conferring with other oil ministers on the oil price drop'.
The Financial Times said that "OPEC Members are not only worried about investor activity in the oil markets, but also preserving high export prices to support government budgets in producer countries. "Many OPEC producers have embarked on big spending programs in recent years on the back of higher oil prices." Which means that OPEC has become accustomed to these higher prices and has spent more money as they make more? (Don't we all?) Saudi Arabia is saying that they are planning to invest over $5 billion Dollars over the next five years in their oil industry. I guess that's assuming prices stay strong.
The paper also points out that Saudi Arabia has been cutting output since the end of last year. That fact shows that the Saudi's will most likely not have a problem cutting back on output if called upon to do so. And if the Saudis cut then the rest of the cartel will most likely fall in line with what is asked of them which in some countries might not be much.
I think that OPEC was trying to leave output unchanged but the market called their bluff. If oil is below $60 a barrel they will most likely be forced to act. Well, if not to act to at least threaten to act and a threat just might be enough to get us through this time of seasonal oil demand weakness. OPEC has not had to show restraint in recent years but it is becoming increasingly clear that they are displeased with the recent price drop. And as bad as OPEC has been at stoping prices from rising they have been much more effective at stopping price collapses. Back in 2004 the last time that OPEC threatened to cut, they established a floor that hasn't been breached since. Will they have the same kind of success at $60 a barrel?
The answer to that question may be determined by the strength of the economy. With some signs of slowing and the FED on hold, the break in price might be exactly what the doctor ordered for the economy. An OPEC cut might start taking supply off the market just as demand starts to rise. And then a few months down the road as demand rebounds prices will rise. Then we can start the whole price rise cycle once again. Sounds familiar doesn't it?
Early weakness in the market and the reason we went below $60 in the first place was because on Friday BP got clearance on Friday to start running oil back through the pipelines at Prudhoe Bay. Which also means that all the oil BP bought in the aftermath of the Prudhoe Bay mishap was not needed?
Is it time to start worrying about Iran again? Iranian President Mahmoud Ahmadinejad was quoted as saying that "We are interested in having talks with everyone. We believe talks are much better than threats and confrontation. We are currently holding talks with many countries. I have said before that the United States is no exception, but the US administration-that is, a section of the US administration-does not create the right circumstances, it destroys chances for constructive talks." I have some advice for the Iranian President, Just shut up!
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The Energy Report is off till next week, as I will be speaking in London at the Financial Times Energy conference and then stopping in New York for the day.
Our Long November Crude Position from apprx 6150 has a long term objective of about 6890. There will also be resistance along the way at 6250 6490 6700. Raise your stop accordingly! We will be back next week! Have a great time trading !
Who is Phil Flynn?
Phil Flynn, Vice President, Energy and General Market Analyst with Alaron Futures and Options (www.AlaronEnergies.com)
, 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.
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