The Energy Report for Tuesday, August 5, 2008

Ch-ch changes. It's change we can believe in especially if you believe that change means changing your position on energy whenever the polls change.

Barack Obama is flopping again in his latest attempt to get ahead of John McCain in the energy debate. Whether you believe that inflated tires or inflated egos are the solution and the problem in the great energy debate, you have to admit Senator Obama has the audacity to change.

First it was the Barack-o-flop on offshore drilling and now it is a Barack-o-flop on using the Strategic Petroleum reserve for a short term fix on prices. All and all Senator Obama is running scared on energy and his shifting positions are a sign that he knows that he has been on the wrong side of the issue and history  when it comes to energy.

Not that changing your position is a bad thing especially when you realize how wrong you have been. In fact I hope Senator Obama continues to shift his position on energy because he has not shifted quite enough. For example Barack Obama  called for tapping into strategic oil reserves as part of his plan to provide relief from high gas prices. This again is a Barack-o-flop as Obama has previously said he was opposed to using the strategic reserves. But now he says he plans to sell 70 million barrels of oil from the reserves in order to lower gas prices. Most of that he will sell is the high quality, low-sulfur sweet crude. He will then later replace it with low quality cheaper heavier   crude.

Yet this proposal to sell light sweet crude from the SPR and replace it with lower grade heavy crude could prove to be a disaster. Tropical Storm Edouard is a reminder how wrongheaded that plan might be. The problem would be refining capacity if we get the kind of  storm that could take  out some major refineries that processed heavy crude. It's possible that if enough heavy crude refineries were put out of commission, oil released from the SPR if it's the heavy stuff might be useless to us. Yes heavy crude might be fine if the Middle East cut off our oil supply but in the event of a major Hurricane disaster it might not help.

He also needs to change on his ridiculous so called windfall profit tax. How much profit do you have to make for it to be a windfall? Well I am sure that will be changed as well.  This gimmick to tax the oil companies to give a break to the middle class will just end up costing all classes more in the long run.  A windfall profits tax on big oil corporations is supposed to provide a $1,000 rebate to people struggling with high energy costs. Yet by taking it out on big oil, foreign countries will gain greater control of the world's energy supply. Give an American family $1000 and at the same time why do we not just outsource our energy security to Russia or China. Get $1000 today and  give China and Russia energy dominance for decades.

Oil prices today are getting hammered on more signs that point to demand destruction. Today  we learned  U.K. manufacturing output fell 0.5% and 1.3% on year in June which was  the biggest annual drop since -1.9% in December 2005. The dollar also rallied as it appears that the weak economic numbers coming out of the UK will put pressure on the Euro zone to worry more about growth and less about inflation and perhaps cut interest rates.  Today the FOMC will take center stage.

The oil  move as I have said before is also been mainly a financial play against risk in the economy. If the market feels the Fed has neutralized the worst case scenario then oil will see further pressure.

Oh no! A 6.0 earthquake in China! Stay tuned!

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Short September crude from apprx 12570 -  stop 12870.

Sell September heating oil at 35500 -  stop 36300.

Sell September RBOB at 32520 -  stop 33000.

Sell August natural gas at 1050 -  stop 1070.

Have a GREAT day!