Phil Flynn: The Great Energy Divide

There is a growing gap is this country between the haves and have nots. This is what I call the great energy divide. If you heat with natural gas you are the fortunate and if you heat with heating oil, well boy, you are in trouble. Once again heating oil soars as US supply is dangerously low and strong demand elsewhere around the globe is keeping our supply tight.

The good news is that as refiners ramp up production to meet heating oil demand, the beneficiary will be gasoline as supply should surge because demand is still weak. This of course opens up a host of spread opportunities whether you are talking about the " Widow Maker", heating oil versus gasoline spread or even the Brent versus WTI spread and the gasoline vs crack could fall while the heat vs crack could rise. The best part is that volatility, the mother's milk of the oil speculators, will continue to run high.

This of shortage has been building for weeks. We wrote about how the heat oil gasoline spread had widened. At the same time we have seen the gas crack tank and the Brent versus WTI spread come back in. At the same time US refiners expected strong demand for WTI crude is one of the reasons that this market may just kiss $100 a barrel. Heat oil is probably headed to above $3.20 so other than worrying about Italy's bond yields or whether the next Greek Prime Minister is going to be Papademos or Popinfresh, oil traders have to watch the supplies of distillates closely as they are the tightest they have been in about four years.

Of course natural gas users are in heaven. While natural gas storage is down 0.2 percent from last year, record supply natural gas stocks should set a new record because of above average temperatures that are being forecast. The EIA said that the week ending Nov. 4, the country's natural gas stockpiles fell 6 billion cubic feet from last year at this time, coming in at 3,831 bcf and increased by a more than expected 37 bcf increase from last week. Stocks are now a whopping 215 bcf above the 5 year average.

Traders are going long heat short natural gas and nat gas prices for the strip are near historic lows for this time of year......Read the entire article.


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Obama Delays Decision on Keystone XL

The U.S. Department of State announced Thursday afternoon that it will postpone making a decision on whether TransCanada's proposed Keystone XL Pipeline project is in the national interest until at least early 2013.

Under Executive Order 13337, the State Department can issue Presidential Permits for transborder pipelines projects that it deems are in the national interest. The department has led what it calls a "transparent, thorough and rigorous" review of TransCanda's permit application for the Keystone XL project, and the executive order directs the secretary of state or a designee to consult with at least eight other federal agencies. The pipeline would carry crude oil approximately 1,661 miles from Alberta's Oil Sands to refineries along the Texas Gulf Coast.

This past summer, the State Department issued its Final Environmental Impact Statement (EIS) for the project under the National Environment Policy Act (NEPA). The agency found that the 36-inch-diameter pipeline would pose "no significant impacts" to most resources along the proposed route. Prior to Thursday's decision to delay making the national interest determination, the State Department accepted public comments during a 90-day review period. Click here for a timeline showing the agency's role in the permit review process......Read the entire article.


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Crude Oil Bulls Cling to Technical Advantage, Gold Bulls Losing Strength

Crude oil was slightly higher overnight as it extends the rally off October's low. Stochastics and the RSI are overbought but remain neutral to bullish signaling that additional short term gains are possible. If December extends the rally off October's low, the 62% retracement level of the May-October decline crossing at 100.08 is the next upside target. Closes below the 20 day moving average crossing at 92.33 would confirm that a short term top has been posted. First resistance is the 62% retracement level of the May-October decline crossing at 100.08. Second resistance is the 75% retracement level of the May-October decline crossing at 105.41. First support is the 10 day moving average crossing at 94.99. Second support is the 20 day moving average crossing at 92.33. Crude oil pivot point for Fridays trading is 97.11.

Natural gas was lower overnight as it extends this year's decline. Stochastics and the RSI are oversold but remain bearish signaling that sideways to lower prices are possible near term. If December extends this year's decline, monthly support crossing at 3.225 is the next downside target. Closes above the reaction high crossing at 3.978 are needed to confirm that a short term low has been posted. First resistance is the reaction high crossing at 3.978. Second resistance is the reaction high crossing at 4.039. First support is the overnight low crossing at 3.605. Second support is monthly support crossing at 3.225. Natural gas pivot point for Fridays trading is 3.656.

Gold was higher overnight as it consolidates some of this week's decline. Stochastics and the RSI are overbought and are turning neutral to bearish hinting that a short term top might be in or is near. Closes below the 20 day moving average crossing at 1719.60 are needed to confirm that a short term top has been posted. If December extends the rally off September's low, the 75% retracement level of September's decline crossing at 1826.50 is the next upside target. First resistance is the 75% retracement level of September's decline crossing at 1826.50. Second resistance is the 87% retracement level of September's decline crossing at 1875.10. First support is the 20 day moving average crossing at 1719.60. Second support is the reaction low crossing at 1681.20. Gold pivot point for Fridays trading is 1757.70.

Adam Hewison: Don’t Underestimate Yesterday’s Market Action

Yesterday’s action in the equity markets is a grim reminder of just how fragile the economic and financial system is globally. We would not dismiss the market action as just another pullback in the market.

The sharp down move should not be ignored, in my opinion. We are looking at a key support level on the S&P 500 at $1220. A close below that level will accelerate the decline to the next key level of support, which is $1180. That move may have to wait until Friday as traders jockey for positions today. For the year, the S&P at the moment is down, the NASDAQ is flat, and the DOW is barely higher with gain of 3%.

The copper market gave a pretty strong negative signal yesterday, as it moved below the $3.50 level. The copper market is telling us that demand is just not there for this industrial metal. For some time now, we have been discussing the trials and tribulations of Europe and all the drama that has become a Greek tragedy. The fact that they have a new prime minister in Greece does not change one thing, in my opinion.

Italy is now the star of the show, and we are not convinced that Prime Minister Berlusconi is going to step down off his pedestal anytime soon. Politicians still have a “quick fix” mentality and are counting on that to solve this mega financial mess. The reality is, there is no quick fix. It is going to take years for this mess to be cleaned up, and in all likelihood it will get ugly.

The best thing a trader can do at the present time is to watch the market action, as it will tell you exactly what to do. We believe the rest of this week is going to be a very important one, particularly where we close tomorrow. If we have a negative close on Friday below $1220 on the S&P 500, we would then expect to see this index move lower for the balance of November.

Now let's take a look at our trend analysis for crude oil........

We suspect that the crude oil market, basis the December contract, will have problems between the $97 a barrel to $100 a barrel level. With a Chart Analysis Score of +70, this market may be trying to move out of its broad trading range and reach the $100 mark. The $100 level represents a 61.8% retracement of the entire down move starting from the highs seen earlier this year in April. Intermediate term traders should be on the sidelines. Long term traders should continue to be short the crude oil market.


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Oil Executive: Military Style "Psy Ops" Experience Applied

Last week’s oil industry conference at the Hyatt Regency Hotel in Houston was supposed to be an industry confab just like any other, a series of panel discussions, light refreshments and an exchange of ideas.

Robert Nickelsberg | Getty Images

It was a gathering of professionals to discuss “media and stakeholder relations” in the hydraulic fracturing industry, companies using the often-controversial oil and gas extraction technique known as “fracking.” But things took an unexpected twist.

CNBC has obtained audiotapes of the event, on which one presenter can be heard recommending that his colleagues download a copy of the Army and Marine Corps counterinsurgency manual. (Click below to hear the audio.) That’s because, he said, the opposition facing the industry is an “insurgency.”

Another told attendees that his company has several former military psychological operations, or “psy ops” specialists on staff, applying their skills in Pennsylvania. (Click below to hear.)

The comments were recorded by an environmental activist, who passed along audio files to CNBC. The activist, Sharon Wilson, is the director of the Oil & Gas Accountability Project for the nonprofit environmental group Earthworks. She said she paid full price to attend the two day event, and wore a nametag identifying her organization as she recorded the conference......Read the entire CNBC article.

Crude Oil Rises Near Three Month High on Europe Sentiment and U.S. Inventories

Crude oil rose to its highest in more than three months in New York as falling unemployment applications and decreasing crude supplies in the U.S. bolstered confidence that demand will remain supported.

Futures extended gains after the Labor Department said that jobless claims fell by 10,000 to 390,000 in the week ended Nov. 5., the lowest level in seven months. Oil had already gained after Italy met its fund raising target in a Treasury bills auction. The International Energy Agency reduced forecasts for global oil demand in 2012 for a third month on weaker prospects for developed nations.

“It’s quite bullish at the moment in the oil market,” said Gerrit Zambo, a trader at Bayerische Landesbank in Munich. “But the bullish sentiment can easily turn again if we see markets crashing further due to the Italian situation”.......Read the entire Bloomberg article.

$100 Resistance Next Target For Crude Oil Bulls

Crude oil closed lower due to profit taking on Wednesday as it consolidated some of the rally off October's low. The mid range close sets the stage for a steady to lower opening on Thursday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term. If December extends the rally off this month's low, the 62% retracement level of the May-October decline crossing at 100.08 is the next upside target. Closes below the 20 day moving average crossing at 91.15 are needed to confirm that a short term top has been posted. First resistance is the 62% retracement level of the May-October decline crossing at 100.08. Second resistance is the 75% retracement level of the May-October decline crossing at 105.41. First support is the 20 day moving average crossing at 91.15. Second support is the reaction low crossing at 89.17.

Natural gas was sharply lower on Wednesday as it extends this week's decline below broken trading range support crossing at 3.724. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term. If December extends this year's decline, monthly support crossing at 3.225 is the next downside target. Closes above the reaction high crossing at 3.978 are needed to confirm that a short term low has been posted. First resistance is the reaction high crossing at 3.978. Second resistance is the reaction high crossing at 4.039. First support is today's low crossing at 3.648. Second support is monthly support crossing at 3.225.


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Phil Flynn: Italy Inverts

Crude oil prices are starting to pullback as the situation in Italy goes from bad to worse. The Italy bond yield curve has gone inverted suggesting that the recent Italian Prime Minister Berlusconi show has taken away Italian confidence and could drive the country into a recession. While Berlusconi is promising to go somehow that is not giving the market the same solace that it seemed to yesterday.

Yesterday Iran fears helped drive the market higher but today it is the concern of economic slowing and the fear of contagion. Maybe because the market is not convinced that the bombing of Iran is not going to happen anytime soon. That makes the news on Chinese inflation data sort of a double edge sword. Yes China inflation hit a five month low and that will allow China some slack to stimulate the economy. Yet at the same time the Chinese economy might be slowing reflecting a great European recession .

President Obama 5 year plan for offshore drilling is a five year plan to economic disaster. President Obama trying to provide political cover for his politically motivated drilling moratorium that has cost this nation thousands of good paying jobs and has intensified the impact of the recession across the south is now proposing a five-year plan to open up six areas for oil and gas drilling, including unleased portions of the Gulf of Mexico and along Alaska's coast which they say is a cautious approach that "will help us continue to reduce our dependence on foreign oil and create jobs here at home."

The problem is that it is too little too late. The Interior Department is proposing just 15 potential lease sales in 2012-2017, with five annual lease sales in the western Gulf beginning next fall, and lease sales in the central Gulf starting in spring 2013. according to reports Two of the lease sales will be held in 2014 and 2016 for tracts in the eastern Gulf. Those that are not currently under a congressionally mandated leasing moratorium, set to expire in 2022, and three more sales would be scheduled in "frontier areas" off Alaska's coast, including the Beaufort and Chukchi seas, and the Cook Inlet.

Also the jobs lost because of the resistance to the Keystone pipeline is it any wonder that the President's approval rating is abysmal?

Email Phil to get a trial of his must have trade levels at pflynn@pfgbest.com

Cory Mitchell: The Macro Dilemma

When asked to explain two scenarios that could play out in the global energy markets, and what it means for energy investors, here's what Cory Mitchell of CMT said. 


Here's Part 1 of his story..... "The Macro Dilemma"

Energy investors need to be aware there are two massive macro forces in our global markets and economies battling it out.  One is obvious (and positive!), and one is not, it's negative.  But the new global credit crunch has brought this dilemma for energy investors into sharp focus:

1.   Stagnant or declining oil production, which should mean oil prices, and oil stocks, are going higher.

But as I'll show you,

2.   If oil production declines, it will have a negative on global debt and GDP—declining oil production will in turn lead to a long-term decline in the global economy – and a declining economy should push the price of oil down.  The lack of continued growth in oil supply has been a constraint on global growth since 2004, says Canada's Sprott Asset Management.

One scenario points to a higher oil price, and another to a lower price—yet they are two sides of the same coin.  And while it's counter-intuitive, lower oil production can potentially lower oil prices by constraining demand. As these contrasting forces play out now and in to the future, oil markets are likely to remain volatile.

The volatility created by this global battle will present opportunities for energy investors as the macro forces play out.

Economic Relationships with Oil

Oil production (and consumption) drives GDP and debt.  While debt is often viewed negatively, it is what allows our economy to expand.  When a consumer goes to the bank and gets a loan, money is created.

This money is then spent and deposited into someone else’s bank account, allowing the bank to grant another loan and so on.  This is healthy for the economy as long as the process is not taken to extremes and leveraged too highly, like what occurred in the 2008 “credit crisis.”

US debt had been steadily rising but has now plateaued, as shown in Figure 1. The problem is, debt, and thus the economy, do not expand if oil production does not expand.

Figure 1. US Government and Non-Government Debt:

*Source The Oil Drum
 

Figure 2 shows the high correlation of oil production and GDP.  Oil production levelling off corresponds to the flattening in debt (above) and GDP that we are currently seeing.  Oil production levelled off in 2005 and GDP is failing to get above 2008 levels after a significant decline.  The plateaus in oil production, debt and GDP may be short-term, or may indicate a long term lack of growth or decline in global economies.

It's interesting to note that oil production and demand has increased steadily by 10 million barrels of oil per day per decade since 1970—just as the world experienced the largest debt increase in global economic history.

Figure 2 World Oil Production and GDP (Crude Production in blue and scale on the right, GDP in red and scale on the left):
 

*Source: Economagic

Figure 3 shows the high correlation of oil consumption to GDP.  The relationship of oil production to these major economic factors—debt and GDP—are unavoidable.  As goes oil production so goes the global economy.  The major issue presented is that oil production has levelled off.  If oil production cannot increase the world has reached “peak oil” and by extension, peak debt and peak GDP.

This means investors need to look for places which still exhibit growth prospects and may even benefit from peak oil over the next several years to decades.

Figure 3. Oil Consumption vs GDP:





 

*Source: Gail Tverberg,  The Link Between Peak Oil and Peak Debt

Issues the Relationship Presents

“Peak oil” occurs when global productions hits maximum output and can no longer continue to increase, leading to a long-term decline in supply.  Oil is what allows economies to operate, and without it to fuel many projects — well, companies, consumers and banks would have no need for debt.  Debt would dramatically drop, forcing down GDP in the process.

Therefore, peak oil and peak debt will create peak GDP.

When peak oil and peak debt (and by extension peak GDP) will exactly occur is unknown, but global production has levelled off and the idea that we are rapidly approaching a global peak oil production is becoming more prominent in the media. Canada, however, is continuing to see its oil production rise—which is providing a very interesting opportunity for energy investors around the globe.

With debt and oil production levelling off, I believe that at some point the world will hit a “growth ceiling,” until some new technological advance drives us forward once again.  This has happened throughout history, when there have been moments of radical growth following a new technology or an increase in productivity.  Then growth levels off or declines until the next big idea comes along.

That big idea may or not be here yet — shale gas, hydrogen and electricity are some the alternatives currently being explored; though the transition away from oil will take at least 30-50 years according to Vaclav Smil in the book, Energy Transitions: History, Requirements and Prospects.  That's not hard to fathom, given the vast infrastructure aligned with our dependence on oil.  At this time, creating or extracting an alternative fuel and transporting it stills relies on oil.

In conclusion, I see the combination of (at least short term) peak oil and peak debt, which should cause lower demand and lower oil prices, continuing to do battle against the idea that lower oil production should obviously mean higher oil price.

To me, this means the oil sector will continue to be a hot bed of macro volatility and investor opportunity.  And in my next article, I'll explain how energy investors can best profit from the volatility created by these two forces.

- Cory Mitchell, CMT

Commodities Gain Strength on the Back of a Weaker U.S. Dollar

Crude oil closed higher on Tuesday extending the rally off October's low. The high range close sets the stage for a steady to higher opening on Wednesday. Stochastics and the RSI are overbought but are neutral to bullish signaling that sideways to higher prices are possible near term. If December extends the rally off this month's low, the 62% retracement level of the May-October decline crossing at 100.08 is the next upside target. Closes below the 20 day moving average crossing at 90.63 are needed to confirm that a short term top has been posted. First resistance is the 62% retracement level of the May-October decline crossing at 100.08. Second resistance is the 75% retracement level of the May-October decline crossing at 105.41. First support is the 20 day moving average crossing at 90.63. Second support is the reaction low crossing at 89.17.

Natural gas was higher due to short covering on Tuesday as it consolidated some of Monday's decline. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term. If December extends this year's decline, monthly support crossing at 3.225 is the next downside target. Closes above the reaction high crossing at 3.978 are needed to confirm that a short term low has been posted. First resistance is the reaction high crossing at 3.978. Second resistance is the reaction high crossing at 4.039. First support is Monday's low crossing at 3.652. Second support is monthly support crossing at 3.225.

Gold closed higher on Tuesday as it extends the rally off September's low. The high range close sets the stage for a steady to higher opening on Wednesday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that additional strength is possible near term. If December extends the rally off September's low, the 75% retracement level of the 2008-2011 rally crossing at 1826.50 is the next upside target. Closes below the 20 day moving average crossing at 1704.70 would confirm that a short term top has been posted. First resistance is the 75% retracement level of the 2008-2011 rally crossing at 1826.50. Second resistance is the 87% retracement level of the 2008-2011 rally crossing at 1875.10. First support is the 10 day moving average crossing at 1748.30. Second support is the 20 day moving average crossing at 1704.70.


Do You Understand How Divergences Work in the Market?