Market Report: The Effect of Supply and Demand on Prices

It's so funny how we don't talk supply anymore. But I ain't losing sleep and I ain't counting sheep. Yet, today we may be counting barrels. Yesterday it was about increasing interest rates in Australia and conspiracy theories against the dollar. Oh no!, they are plotting against the dollar! Run and hide! Run and hide in commodities. Today it may be back to good old supply and demand. The Energy Information Agency releases there weekly snapshot of supply and demand and now the market will focus on the old fashion fundamentals if only for a moment. And judging by Last night's American Petroleum Institute's version this report may raise a few eyebrows, especially when it comes to distillate supply

The API reported a stunning week over week supply drop in distillates of 2.9 million barrels. This was the main feature of the report and the main reason it will fall into the bullish category. Heating oil stocks fell by 892,000 barrels. The API also reported a small drop in crude oil supply to the tune of 254,000 barrels most of which came in Cushing, Oklahoma the Nymex delivery point. Gasoline stocks rose a modest 544,000 barrels. Despite the fact that supplies in every category are well above normal, if the EIA reports similar number this should feed into the bullish momentum that has engulfed the energy complex over the last couple of days.

Of course this bullishness in the market place has not really helped out refiners. Reuter's news reports that Sunoco Inc will indefinitely idle its 145,000-barrel-per-day Eagle Point refinery in Westville, New Jersey, to reduce losses in its refining business. Sunoco says that the recessionary economy and weak demand for refined products and increased global refining capacity have created margin pressure on the entire refining industry. Sunoco will lay off about 450 workers adding to more doom and gloom on the employment front.

But there was some good news. In the EIA's October "Short-Term Energy Outlook" they are projecting lower heating bills for U.S. consumers. On average the EIA says that bills for space-heating fuels will be 8 percent lower than a year ago, with the average household spending $960 in the October through March winter heating season, a decrease of $84 from last winter. We will take it. The EIA says that the lower bills primarily reflect lower fuel prices, although slightly milder weather than last winter will also contribute to less fuel use in many areas. They expect the largest decreases in fuel expenses in households using natural gas and propane.

Of course it will really depend on the weather and how cold the winter turns out to be. Now when it comes to weather should we be more focused on cold weather and heating degree days or hurricanes? Yes hurricane season is still upon us and guess what -- there's a new tropical storm in the Atlantic Ocean, Tropical Storm Henri. Now it is too early to know whether Henri will become a Hurricane or even go into the Gulf but it is reminder that when it comes to hurricane season it ain't over until it's over.

Well one good thing about the global economic slowdown. It has made the planet safer. According to the EIA projections for 2009 imply a 5.9 percent reduction in U.S. carbon dioxide (CO2) emissions from fossil fuels from the 2008 level. The EIA says that several factors contributed to a projected reduction of nearly 6 percent in U.S. carbon dioxide emissions from fossil fuel use in 2009, primarily associated with the economic downturn. So this might make you feel a bit better when you are in the unemployment line. At least the planet is getting better and Al Gore finally found something to smile about.

Increased risk appetite is back again as the rate increase in Australia is giving the inflation hawks the edge. The US looks weaker and out of balance. In the mean time the story that Saudis and Gulf Arabs states along with China, Russia, Japan and France are meeting in the grassy knoll to replace the dollar continues to feed on the markets paranoia and puts more pressure on the Fed to lay out an exit strategy. Forget the conspiracy theories the leaders of all of these counties have already spoken openly about the dollar. The truth is that the dollar is going to seal its own fate. If we keep printing money and don't get our spending under control, it won't matter if the US currency is used or not used.

Global transactions are still being done in dollars but we are already seeing that those transactions are getting hedged. We are seeing those holders of dollars diversifying away from those transactions by buying things like gold and silver and oil. In the end does it really matter? We have to get our own house in order and then and only then will the greenback win back the respect of the world.


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