Alaron Energy Comment

CHICAGO - Dec 14/07 - SNS -- Following is the energy futures comment from Alaron Trading Corp.

The Economy is slowing but demand for oil goes up? Maybe the stock market isn't totally buying what the Federal Reserve is selling but the International Energy Agency is. And buying it hook line and sinker. Alan Greenspan is raising the odds of a recession but the IEA is lowering it.

The IEA says that world oil demand will rise by 2.1 million barrels per day up 200,000 barrels from its previous forecast. Huh?  Oil, after a major rejection of the $95 barrel price level,  is making a come back based off these rising expectations for oil demand. The IEA is raising its demand forecast. That's right, you heard me correctly. Raising it expectations for demand giving the oil bulls more hope that they will see that $100 print before the end of the year. The IEA is raising demand in the Middle East and says the world is resilient to high oil prices.

Maybe they are hoping to support oil so OPEC will keep pumping it. Usually the IEA underestimates demand but now I think they are overestimating demand.

The January option expiration was exciting. Oil went contango and  back to backwardation. Sort of like the game twister. The lack of contango is because of less geo-political risk. The Saudis that have already done a great job with security according to Reuters and  is building up a special 35,000-strong rapid reaction force to protect its energy installations from attacks. That is bearish for oil as the risk premium continues to come down.

Just take those old records off the shelf because there may not be a new record for oil in 2008. If you like records, oil traders will have to live in the past. Year after year oil has made record highs but this year it's not that likely. Every year since 2003 oil has broken the record high set the year before. This has been so common in this era of energy  that new highs every year for many traders are already just a given. Yet in the year ahead I doubt that the record high we establish 2007 will be broken in 2008 unless we get a real cold winter or some unusual geo-political event.

Now I know what some of you are thinking. That perhaps I am some kind of frustrated oil bear that is out of touch with market realities but let me tell you that is not the case. Even though I am bearish  for 2008, over the last few years there is hardly anyone out there that has  more  credible long term bullish credentials. Not only have I have been a long term bull throughout this entire decade, I was bullish before bullish was cool. Anyone remember when crude oil was $10.00?

Being an oil bull these days is not a bold position to stake out but when I originally started to state the bullish   case for oil,  it was not exactly a popular position to take. I was one of the first analysts that warned about the effect of China on the world commodity prices. How oil in late 1999 hit bottom and signaled a long term shift in the commodity cycle  and that oil prices were going to move sharply higher. And how higher oil prices were not signaling doom and gloom but really the improvement of the standards of living of people all over the globe. That high oil was a good thing that did not signal a recession but strong economic growth.

Last year  for the  2007 outlook, I compared the run in crude oil to a sports dynasty and predicted - correctly -  that oil would set a new high. I predicted oil would hit $85 in 2007; a position I was criticized for when oil dropped to $50. Of course not only did oil hit $85 but exceeded it. Now the same people who said we would never see $85 are so bullish it's crazy talking like $110 $120 and beyond.

Yet for this new  year I think that oil will not exceed the 2007 levels unless we get some type of event. (War, hurricanes, etc). Oil is due for a breather in 2008 and why not, because it has been on one incredible run.

The reason  I  believe this  is because the way the US credit crisis affected the price of oil and the outlook for demand. Demand is rising but not as strong as projected and a little known fact that daily world oil production in 2007 hit an all time high of 86.43 million barrels a day last October.  Still, oil flirted with $100 a barrel but it is unlikely we will see that level in 2008.

In fact I might contend that oil would have never got to the high nineties in 2007 if it were not for the fact that we had the credit crisis in the first place. Oil put on at least $10 a barrel after the Fed and their surprise 50 basis point rate cut in October. That tanked the dollar and propped up oil. Commodity funds bought oil and hedged the dollar with oil and the market soared. In other words the Fed basically tacked on an extra $10 a barrel in 2007. That 10 dollars the Fed added was the same $10 we would have gained in 2008 had it not been for Fed action.

You see speaking in rough numbers oil has been adding $10 a year even with all of the historic demand growth that we have had over the last few years. (Yes I know about peak oil etc.) But even with all the bullish arguments $10 was the number.  This year was no different until the Fed worked its rate cutting magic. When the Fed intervened we added $20. So the Fed, because of their rate cut, probably gave us all of next year's move in the last few months of 2007. Because we added an extra 10 dollars in 2008, we will be hard pressed to extend this market much higher.

Demand growth in 2008 will be questionable due to the crisis but production should rise. Less demand growth and more production probably means lower prices unless something bad happens. We will see a drag in demand due to economic problems but the bearish forecast is not all about bad news. It is also because the world looks to be a safer place in 2008.

The best part of my outlook for 2008 is the fact that geo-politically speaking the oil market in 2008 looks much safer than it has perhaps since the attacks of September 11 2001. In the 2007 outlook I wrote that, “The market spent most of 2006 living in a state of fear that was sometimes real and sometimes imagined. It was a year of geo-political tensions with Iran and war in Middle-East.â€�  This year many were convinced that we would see a war in Iran and that Iraq was going to be a lost cause. (Just ask Senator Surrender Harry Reid). Yet the surge in Iraq has worked and it should mean more oil production from an unexpected source -  Iraq.

Al –Qaeda, though still a threat, took massive losses in Iraq. Despite the boasts that they would destroy oil facilities they have yet to stage a successful attack on oil. The market is less fearful of Al-Qaeda in 2008 than they have been in a very long time.

Iran drove oil higher on fear in 2007. They took British sailors hostage and released them and caused much fear and loathing in the oil market. Yet nothing has happened. Now  US intelligence shows that Iran dropped its pursuit of a nuclear weapon temporarily lessening the risk for a war in 2008.

There are peace talks again with the Israelis and Palestinians. And North Korea gave up its nuclear weapons. Libya is allowing foreign investment and has given up on supporting terror. It looks like the Bush Doctrine is starting to pay dividends and we are winning the war on terror. For oil, that should reduce the terror premium and we should see dividends as we move forward.

Still the Energy Information Agency, which is The Department of Energy information arm, is warning that  global oil markets will likely remain tight through the first part of 2008, which I agree with. The EIA projects that world oil demand will grow much faster than oil supply outside of the Organization of Petroleum Exporting Countries (OPEC), leaving OPEC and inventories to offset the resultant upward pressure on prices.

The EIA criticized OPEC for not raising their quota but they failed to mention that OPEC did raise output.  The EIA says West Texas Intermediate (WTI) monthly crude oil prices averaged more than $85 per barrel in October and almost $95 per barrel in November, up $27 and $36 per barrel, respectively, from a year earlier. The daily closing spot price for WTI peaked at $99.16 per barrel on November 20, but started falling near the end of the month in anticipation of additional OPEC production and is expected to continue to decline slightly through 2008.   Monthly average prices for WTI are expected to exceed $80 per barrel over the next year.

I think the EIA is high on the average as I expect crude will average $80.25 yet  I do  think oil could hit as low as $6250. Yes, a bearish target for 2008! I know my long term fans will be shocked.

Don't Be Shocked! Get full access to me! Open your account! Call me at 800-935-6487 or email me at pflynn@alaron.com.

Sell January crude at 9370 -  stop 9580.

Sell January heating oil at 24500 -  stop 26500.

Sell January RBOB at 24100 - stop 245.

Stopped on long  January Natural Gas from apprx 710 at apprx 740.  Buy January natural gas at 703 -  stop 680.  

Phil Flynn

Alaron Research Team

800.563.9510

pflynn@alaron.com

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