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Buckle Your Seat Belt

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If you are trying to trade energy in this market you need not only a seat belt but also a shoulder harness and a parachute if recent swings are any indication.

Crude oil traded under $55 on Thursday before rebounding back to $59 on a wild market ride. The morning drop came on a government inventory report that was not that bearish. Crude levels remained flat from the prior week at 311.9 million barrels and distillates rose only 500,000 barrels. The only bearish factor was a rise in gasoline inventories to 198.1 million barrels, a rise of two million barrels for the week. This rise came despite even more states reporting gasoline prices under $2 at retail.

Refinery utilization fell to 84.6% as many refiners cut production rather than soak the market with extra gasoline supplies. Current gasoline production is 9.1 mbpd. Crude demand has fallen -7.7% below 2007 levels and -6.5% since Labor Day. Gasoline demand typically declines after Labor Day but this is much sharper than normal.

The rebound in the equity markets had a lot to do with the rebound in crude but OPEC officials were actively talking up the price saying OPEC would act again on Nov-29th to reduce production by one million barrels per day.

OPEC president Chakib Khelil said OPEC members would make the right decision on Nov-29th to support prices. Qatar's oil minister called for "strong support" for OPEC from non-OPEC producers "so there is a balance between supply and demand." Venezuela's oil minister said Venezuela would propose a further cut of one million barrels at the Dec-17th meeting in Oran, Algeria. Iran said they would support a cut of one million barrels at the Nov-29th meeting. It sounds like OPEC is about to embark on a cut a month program until prices rebound.

The IEA said on Thursday that 2008 demand growth would be the slowest since 1985 and 2009 growth would slow to only 350,000 barrels per day more than 2008. This is 340,000 bpd lower than their prior forecast but these are updated every month. Once low prices rekindle demand their estimates will rebound sharply. They are basing their lowered estimates on the last six weeks of demand decline and I believe most people will resume driving now that gasoline is under $2 per gallon and down from $3.25 six weeks ago.

Thursday's rebound was market driven and not a reaction to fundamental forces. However we are at levels ($55) where there is strong support and even fears of a global recession are going to have trouble pushing prices lower.

Jim Brown

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