Crude prices continued to plunge last week to $68.57 before rebounding to $74.30 intraday on Friday. The rebound came on news that OPEC had rescheduled its emergency production meeting from Nov-18th to Oct-24th. OPEC is scared that a global recession will send prices much lower than their unofficial target of $90-$100. As a temporary dip from hedge fund liquidations they could stand $70 but they have already tasted the fruits of $100 oil and I believe they will do whatever it takes to see that level again. OPEC said in a statement last week that they will also consider the global economic outlook as well as current demand in determining future production levels.
We have had numerous geopolitical challenges as well as weather problems over the last month and all were ignored. OPEC is probably shocked by these events. I would bet they are wishing for a return that investor speculation that they cursed as the cause of high prices back in the summer.
OPEC is expected to cut as much as one million barrels in addition to the 500,000 barrels they cut at the last meeting. The results of the last cut only amounted to about 175,000 bpd fewer being shipped since the September meeting. It appears there was no rush to close those valves. If OPEC does agree to make a massive cut next week it will be mostly up to Saudi Arabia to take that production offline. The other OPEC nations are already struggling to survive on $70 oil and cannot be counted on to pump less. In the past Saudi grew tired of being the only OPEC nation to cut production and in the late 1990s went on a production binge to oversupply the world with oil and drive down prices to punish the other OPEC nations who refused to cut. Oil prices fell to $10 a barrel before everyone agreed to toe the line. Hopefully for our positions Saudi will not have to remind them again by pushing prices lower. Hopefully those reminders will occur in committee and everyone will salute and obey orders.
On the positive side the drop from $140 to $70 has produced a $350 billion price cut at the pump for U.S. consumers. The average price of U.S. gasoline on Friday was $2.99 per gallon according to AAA. Based on the current price of oil we could see gasoline prices decline below $2.75 and potentially $2.50. While I can't conceive that refiners are going to let prices fall that low it will depend on demand. If demand falls so will the prices. The EIA reported on Thursday that demand in the U.S. actually rose for the first time in the last six weeks. It was probably all those SUV drivers finally filling up their tanks instead of just getting $75 when the pump cut off their credit cards.
The falling gasoline prices are the worst event possible for recent conservation plans. If gas returns to $2.75 the sales of SUVs will rocket again and the automakers will be running in circles trying to decide what kind of cars to build. Conservation will be put on the back burner again and talk of peak oil will disappear, at least for the next year. As energy investors we understand that nothing has changed in the long-term outlook. This is just an Indian summer of sorts for consumers. The petroleum winter will eventually arrive.
Also impacting crude prices last week was the expiration of crude options on Thursday. Next week November crude futures will expire on Tuesday. You can bet that anyone still holding November contracts are going to be creating additional volatility when they close those positions next week. Once into the December contract the impact of OPEC and heating oil sales will be the controlling factor. The gasoline shortage in the Southeast is nearly over. Most refineries are back online and gasoline inventories have increased by 7 million barrels in each of the last two weeks.
TrimTabs claims the redemptions by hedge funds should be about over. The redemption period has passed and the next window is Dec-31st to Jan-15th. However, TrimTabs also said mutual funds were seeing withdrawals of $5 billion per day because the average investor does not understand the massive bailout programs. Until these redemptions stop the market will still be at their mercy. The way to tell if redemptions are still occurring is to watch the tape from 2:30 to the close. If sellers continue to appear then funds are still receiving redemptions. They open the daily mail, process the phone requests and then determine their positive/negative cash balance for the day. If there were more redemptions than deposits the order goes out to sell. Once we see buyers before the close instead of sellers the worst will be over.
I did not add any new plays this week. We have a full portfolio and I hesitate to add anything else until we see what the market is going to do. I personally believe we are at or near a bottom but we could still see some volatility until the expiring options are cleared and we get through a week without any financial disaster. Earnings are going to be heavy next week and that could help distract investors from worry over the financial crisis.
November Natural Gas Futures Chart - Daily
November Gasoline Chart - Weekly