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Wednesday, January 10, 2007

Notes for Bloomberg TV Appearance Today

I'm appearing on Bloomberg TV's "Marketline," with Ellen Braitman and Sandra Smith, today at 1:30 to 1:35 (don't blink -- you'll miss me). They want to talk about the forces driving oil. Here are my preliminary notes -- I'll update them after we get the US fuel inventory numbers at 10:30.

Notes for Bloomberg TV appearance

3 biggest drivers in energy right now are …

1) “Weirdly warm” U.S. winter
2) A shift in investment fund money – have you seen the volume in oil lately? All the hedge funds are running to the other side of the boat

3) Draining of the fear premium related to the Middle East.

Also, inventories are shrinking – consumer suppliers are more comfortable with lower inventories. That could come back to bite if there is a problem.

Bottom line: the front month should remain under pressure, with increased volatility, as the shorts have the longs on the run and are crushing them. As cold weather settles in, the oil strip further out will get into steeper contango.

At around $45 per barrel, small E&P producers will start capping marginal production. That is strong support.

Recommendation (if they ask me for one): Oil stocks should go lower, but it takes guts to short them when the events controlling prices include the ever-shifting weather and the Middle East. If I had to pick likely victims, shippers including Teekay or General Maritime are very vulnerable. Their margins should stink going forward. Look to pick up bargains if oil gets to $45.

That said, oil could turn on a dime if we get a Big Chill, or things heat up with Iran.

More urgently, US fuel inventory data comes in today, and most everyone expects a build. If there is an unexpectedly large drawdown, that could inject volatility into the market rather quickly – Update at 10:30

10:30 Update: Inventories of distillates, including heating oil, surged by their biggest gain in about three years. Gasoline stockpiles are up, too. Crude oil had a draw-down, but not nearly enough. Crude is tanking on the news. We'll see where it ends the day, but the bears are still in control (for now).

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