The Energy Report for Wednesday, January 31, 2007



Is it possible to get frozen out of your shorts? Funds are fleeing the energy complex but this time it’s the short side that's being covered. It’s the end of the month and the bears have owned the month of January! And it wasn't only the crude oil bears but the Chicago Bears as well! Go Bears!



Was yesterday's spectacular rally - the biggest one day oil rally since September of 2005 - just as simple as the funds desire to book profits and earn those incentives at the end of the month? Or was it so they could collect there share of the profits? Maybe it was a sign that they were just frozen out of there shorts? Now you know it is not a nice thing to get frozen out of your shorts - especially in January - as I am sure many traders found out yesterday was the case. And I am not just talking about frostbite, though obviously that can be very nasty. The funds bet heavily on global warming in the month of January and they may now be embracing the possibility of an ice age in February.



Minds have been changing before our very eyes. Whether it’s the changing of the minds of weather forecasters that are admitting that February will be much colder than normal or the country of Saudi Arabia that can’t decide what price of oil they really want for their oil. Hint - if they want $50.00 a barrel they should not be cutting production.

What we could be experiencing is a changing of the minds as well as a changing of the market psychology which has been decidedly more bullish as we end the month of January. Energies came in like a bear and went out like a bull.



As fancy as we oil prognosticators like to be, we are constantly reminded how Mother Nature too often has the final say on the price that we pay. The warm start to January allowed the commodity funds to drive down the price of oil to below $50.00 a barrel, a level that would have been impossible to reach in my opinion, if it were not for the El Niño phenomena. When oil hit $50.00 we had crazy predictions of $20.00 a barrel oil but now with winter back, these ideas seem as ludicrous as the calls for $100.00 when we were at $78.00. Nowhere was the impact of weather more apparent on the fortunes of yesterday’s trade than on natural gas traders. Perhaps they were frozen out of the market as once again forecasters are calling for more of an artic freeze than anticipated. Sub zero temperatures in the Midwest caused natural gas to scream.



All we hear now is how natural gas cannot rally because the storage for gas is well above the five year average. Well guess what, add a few sub zero temperatures and bang we are on our way.



Today's trade may set the tone for the upcoming month of February. Will the funds jump back in to start the month and if they do will they go long or short. Will they take there cue from today’s oil inventories? Stay tuned!



A cartel by any other name still stinks. Russia is denying that it's planning an OPEC-style exporting group like the one Iran’s Supreme Weiner - Ayatollah Khamenei - proposed last week. Instead, according to Russian Security Council head, they will just hold active talks with other producers to coordinate policies. So in other words, it’s kind of like a cartel but just without the fancy meetings.



A new Cuban missile crisis Venezuela style. Russia is in talks with Venezuela about selling them a missile defense system. When do we start the blockade?



Pop, pop, fizz, fizz, oh what a relief it is. Is the China bubble getting ready to go pop? The Financial Times reports that a senior Chinese legislator is warning that the Chinese stock market is developing into a bubble. Cheng Siwei, who is the vice-chairman of the National People’s Congress, warns that there is a bubble going on and people should be aware of the risks!



Iran worries. If it isn’t the UN warning that Iran is days away from ramping up its nuclear program, it's reports that Iran was behind the ambush and killing of US soldiers in Iraq. Iran is becoming more of a worry with each passing day.



Ethanol Corner. How about those Frosted Flakes? They're Grrrrreat! But they are also costing more money to make! Kellogg, maker of many of your morning cereals, reported that 4th quarter net income fell 5.2% mainly due to the cost of corn and wheat that has gone up dramatically. Tony the Tiger is not thinking that's so grrrreat.



The dirty side of clean air. The New York Times reports that the use of palm oil as a dream fuel to replace coal and oil is now becoming an "Eco- Nightmare”. The push to use palm oil as a sustainable energy by encouraging electric companies to use the fuel has created unforeseen problems. "Spurred by government subsidies, energy companies became so enthusiastic that they designed generators that ran exclusively on palm oil, which in theory would be cleaner than fossil fuels like coal because it is derived from plants".

Rising demand for palm oil in Europe brought about the clearing of huge tracts of Southeast Asian rainforest and the overuse of chemicals there.

"Worse still, the scientists said, space for the expanding palm plantations was often created by draining and burning peat land, which sent huge amounts of carbon emissions into the atmosphere”. Maybe these ideas should be thoroughly thought through first. Back to the drawing board.



All and all, with temperatures in Chicago below zero, maybe global warming isn't such a bad thing and maybe we should find out the real story behind it before we ruin something else.
We are long March crude from apprx 5151 on the rollover - raise stop to 5400!!!



We are long March RBOB from apprx 14941 on the rollover - raise stop 15200!!!



We are long March heating oil from 15600 - raise stop to 16000!!!



Buy March natural gas at 740 - stop 730.



Have a GREAT day!