Option Investor


Printer friendly version

Despite almost daily sound bites from multiple OPEC members or officials about further production cuts the price of oil remains in the mid $50s.

Crude closed at $57 on Friday despite a confirmation from OPEC they would hold a special meeting in Cairo on Nov-29th to discuss production cuts. Iran and Venezuela are leading the charge to cut another one million barrels per day of production and Venezuela is already claiming they will push for another million-barrel cut at the Dec-17th meeting.

Traders are saying OPEC who? The constant chatter in the press is being ignored as is the news of new violence in Nigeria. The IEA World Energy Outlook report released on Wednesday was also ignored even though it built a case for $100 oil sooner rather than later.

The problem remains fund liquidations and fears over a rapidly slowing global economy. The EU announced on Friday it had officially fallen into a recession. That should not be a surprise to anyone since the majority of the world is heading there fast. Retailers are predicting the worst holiday shopping season in a lifetime. Crude demand in the U.S. has fallen -6.5% over the last six weeks. The IEA said on Thursday overall demand for 2008 would only rise by +350,000 bpd and that was the lowest gain since 1985. If the recessionary conditions continue to worsen the IEA believes that global demand in 2009 could be lower than 2008.

The price of natural gas has fallen so low that Boone Pickens has put his plans to build a 4,000 megawatt wind farm in Texas on hold because lower prices for gas would make it uneconomic. Pickens said gas prices need to be around $9 per BTU and it settled on Tuesday at $6.70 per BTU after falling -7.5%. That was the biggest one day decline since Sept 2nd when gas fell 8.6%.

With gasoline prices falling so sharply I am amazed demand has not yet rebounded. The price per gallon has dropped below $20 in more than 25 states with Wyoming getting credit for the lowest price last week. The Maverik store in Wheatland WY was selling gas for $1.45 per gallon on Thursday and 2-cents less if you used a store loyalty card.

Eventually something or more than likely several things will happen to put a bottom under oil prices but until that bottom appears the volatility could continue to be huge. December crude futures expire on Wednesday so expect some more volatility early in the week. Fortunately Thursday's rebound in prices pulled several energy positions back from the brink in danger of being stopped out. The banks were not that fortunate as continued selling in the sector took us out of BAC and the XLF.

I promised everyone an update on the IEA World Energy report that came out on Wednesday. I have not finished with it yet but I hope to have that update by next weekend.

Jim Brown

December Crude Futures Chart - Monthly
[Image 1]
December Natural Gas Futures Chart - Monthly
[Image 2]
December Gasoline Chart - Weekly
[Image 3]

Leaps Trader Commentary Archives