Alaron Energy Comment

CHICAGO - Jun 12/08 - SNS -- Following is the energy futures comment from Alaron Trading Corp.

There was a flood of reasons for oil to rally yesterday but one reason many might not think about is the devastating floods that have submerged a large portion of our nation's corn crop.

Corn futures, along with all the other grains in the complex, soared closing up to the daily allowable limit as the last dimming hopes for a record corn crop got washed away in these summer rains. The reason why corn matters so much to oil and products is the impact this will have on bio-fuels. If we have less grain for ethanol that means we will use more oil.

Just two days ago in the Department of Energy Short Term Outlook report they surmised that world oil consumption would grow by only by 1 million barrels per day. The reason why they felt that way was declining demand in the United States due to multiple factors. In the report the Department of Energy  projected that U.S. consumption of liquid fuels and other petroleum would fall by about 290,000 barrels a day in 2008 because of higher petroleum product prices and slower economic growth. But the key for a further dip in demand was when the report adjusted the demand figures lower because of our increased amount of ethanol use. Yes, ethanol is lowering our demand for oil.

How much lower? Well demand for oil was lowered by 440,000 barrels a day directly due to the increased use of ethanol. How significant is that going to be in the whole scheme of things? Potentially it could be very significant.   And the reason I say that is  the record high corn prices and a flooded out crop  raises the larger issue of what I call ethanol ethics.

What is this ethanol ethical dilemma? Well the U.S. Congress is going to have to decide if we continue to push ethanol at a time when food prices and potentially hunger might soar across the world. If the U.S. loses a major chunk of its corn crop can we honestly feel good subsiding ethanol as it may cause some people to starve? The rush to ethanol and the substantial subsides has created a bit of a monster and a flooded crop may force Congress to act. The rapid increase of ethanol plants across the nation fueled by a feeding fuel frenzy  has driven acres and potential grain dislocations across the continent. Congress may be forced to at least temporarily back off on ethanol and push us back to oil. No one ever said that breaking addictions would be easy.

But corn wasn't the only reason why oil rallied. We certainly would never forget  the weekly crude oil inventory report! Oil got a moon-shot number in crude when the EIA reported that U.S. commercial crude oil inventories fell  by 4.6 million barrels from the previous week. At 302.2 million barrels, U.S. crude oil inventories are at the lower boundary of the average range. Crude supply has slid on poor refining demand as more and more oil goes to China. Cushing, Oklahoma stocks fell but really haven't lost ground over the last few weeks and the bulk of the draw was on the West Coast. Still the lower trend is disturbing.

Crude oil demand was weak as refinery inputs averaged 15.3 million barrels per day during the week ending June 6, down 161,000 barrels per day from the previous week's average. Refineries run operated at 88.6 percent.

The good news was that distillate fuel inventories increased by 2.3 million barrels.  With bean oil flying the biodiesel angle kept us higher.

Gasoline demand is bad as the report showed that total motor gasoline inventories increased by 1.0 million barrels last week. That was even as gasoline production moved lower compared to the previous week coming in averaging about 9.0 million barrels per day. As you can see that means that the Department of Energy   is catching up with the private demand watchers and showing that over the last four weeks, motor gasoline demand has averaged 9.3 million barrels per day, down by 1.3 percent from the same period last year.

And of course the other factor is the dollar. The dollar is driving the market again  and you can bet your bottom dollar that it will do so again today!  If you have some dollars you want to risk in the futures and options on futures markets then call me to open an account at 800-935-6487 or email me at pflynn@alaron.com! I love all your emails and I will get back to you! If I haven't please email me again! The Energy Report Readers rock!  Also call your cable operator and sign up for the Fox Business Network! That is the only way to see Liz Clamen and David Asmen and me all at the same time!! I don't know how you can trade without it and  I don't know why you would want to! What are you,  crazy?!

Sell July crude oil at 140 -  stop 142.

Sell July RBOB at 360 -  stop 365.

Buy July heating oil at 360 - stop 355.

We're long  July natural gas from apprx  1240 -  stop 1170.

Have a GREAT day!        

Phil Flynn

Alaron Research Team

800.563.9510

pflynn@alaron.com

DISCLAIMER: Futures and options trading involve substantial risk. The valuation of futures and options may fluctuate, and as a result, clients may lose more then their original investment. In no event should the content of this website be construed as an express of an implied promise, guarantee or implication by of from the author(s) that you will profit or that losses can or will be limited in any manner whatsoever. Past performance is not necessarily indicative of future results. Information provided on this website is intended solely for informative purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Alaron Trading Corp. its officers, directors, employees and brokers may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report.

Information on this page is derived from third parties and is deemed to be reliable. STAT Communications Ltd. accepts no responsibility for errors, omissions or inaccuracies in any of the material presented on this web site. Opinions expressed on this web site are those of the respective individuals and/or institutions and do not represent the opinions of STAT Communications Ltd. and/or STAT Publishing or its staff and/or management.