Trading the Long-Term Politics of the Oil Disaster

06/17/2010 12:01 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

What do you get when you put together a Nobel Prize-winning physicist, national labs, and experts from academia and other oil companies? You get what could be called a 90% solution. President Obama addressed the nation from the Oval Office and said that his efforts to wage war against the oil spill that is assaulting our shores and our citizens would result in capturing up to 90% of oil leaking out of that BP well disaster. I would say that is an amazing effort. Yet while he wages war against this oil spill, why he is not allowing our allies to help in the effort? By not waving what is known as the Jones Act, or its real name, the Merchant Marine act of 1920, he is slowing down the efforts to capture oil from the spill. The Jones Act requires that all ships that carry goods in US waters be carried in US-flagged ships, constructed in the United States, owned by US citizens, and crewed by US citizens and US permanent residents. The problem is that this act would forbid the help of foreign ships that have the technology to help clean up the oil. We already have had offers from other countries that have the technology to help with the cleanup, but it has been lost in the muck of Obama politics. By lifting the Jones Act, as President Bush did during Hurricane Katrina, it may offend his union base. Besides, by doing so this late in the game, it may show that the president was behind the curve on this spill disaster, and so ultimately, it may be an issue of his pride. The AP reported that US senator George LeMieux and US representative Jeff Miller want Barack Obama to waive the law that is keeping foreign oil skimmers out of the Gulf of Mexico. The AP reported that US senator Bill Nelson said Homeland Security Secretary Janet Napolitano has assured him skimmers from the Netherlands and other European counties are on their way. Of course, why has it taken 57 days?

If Obama is right and we can begin capturing 90% of the oil in a matter days, then is oil worrying over nothing. Oh sure, up until now, the front end of the crude oil curve paid little attention to the Gulf spill as it focused more on the economic problems in Europe. Yet somehow, the market is acting like those problems are yesterday news. The euro soared, dragging oil along with it as the market celebrated the return of euro currency confidence. Yet beyond the straight up and down move in oil, if you read between the lines, the risk to oil prices from the Gulf spill are being felt closer into the present. The front end of the market is increasing at a faster rate, showing increased sensitivity to the spill news in the Gulf increasing prices to help moderate demand to assure future supplies. Which may or not be necessary assuming the Obama administration moves quickly to remove the drilling moratorium, and assuming he is right that they will soon be capturing 90% of the oil and that the leak will be stopped completely by late summer.

Despite all the enthusiasm in the stock market, the oil demand numbers do not seem to be quite as optimistic, at least when you look at the American Petroleum Institute report and the MasterCard SpendingPulse report together. Not only did we see gasoline stocks increase by 1.3 million barrels last week, we see the four-week average demand numbers start to fall. According to Bloomberg News, even though gasoline demand at the pump rose last week as prices fell to the lowest level in 14 weeks, the increase was not enough to rebound to offset the 5.8% decline last week. Fuel use was 2.2% below a year earlier, the second consecutive decline. The four-week average demand was 9.37 million barrels a day, 0.6% above a year earlier. That gap is narrower than the gains of 1.5% and 2.2% the prior two weeks.

Yesterday’s option expiration may have also played into the market place. The roll to the August contract will accelerate. That wider range will offer higher risk and profit potential into today's Energy Information Agency numbers. The play for new positions would be to sell a big rally or break, and you can contact me for those levels.

The storm threat from the Atlantic is diminishing quickly, yet natural gas does not seem to care. What was a storm that at one point had a 60% chance of becoming a hurricane now has only a 10% chance, yet the strength in the market seems to go beyond that at this point. The natural gas seems more focused on hot weather and air conditioning demand and the drilling moratorium in the Gulf. The move has been explosive. Stay tuned…there is opportunity in everything.

By Phil Flynn of PFGBest.com

Related Articles on COMMODITIES