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800-634-3194(November 24, 1999) ENERGY COMPLEX: Oil prices spiked to their highest level since the Gulf War on news that Iraq had stopped oil deliveries in the food for oil exchange. Iraq produces 2.2 million barrels per day, and this could lead to an even greater shortfall if it occurs. Which is an important point. Saddam certainly likes brinkmanship, but it would seem to me that this is easily turned against him. Consider: The U.S. has ample supplies of oil in the strategic stockpile.
Some politicians had already been talking up the prospect of selling part of it, but I suspect that it wasn't viewed as a viable alternative one, because the shortage is implied, not real, and two, the West has been trying to build an ongoing relationship with the OPEC producers, and this would derail the efforts both of the oil producers and the politicians. But now, both the west and OPEC could have a common villain if the floodgates open and millions of barrels of oil are made available. At the very least, I don't see OPEC as being able to hold the line on production cuts or otherwise taking the high road when someone tries to take the world hostage. Perhaps this signals the end of the bull market. Or maybe I'm all wet. We'll see.
Crude oil is now at levels last seen during the Gulf War. Which brings up an interesting question. Are we in an environment in which these prices are sustainable? They weren't in the Gulf War. Another point is that crude stocks are above 1996 levels. That in fact is one of the goals of OPEC, to try to bring oil stocks back to 1996 levels. I would also have to wonder about demand. While I am of the opinion that the Asian economies are on the rebound and that the western economies are still strong, I'm not sure I see the demand as being what it was back then. As things stand now, crude is trading at its highest level in years, with crude supplies now 9% below year ago levels. Talk that the OPEC production cutback may be adhered to even beyond the March deadline is supportive, with ideas that the cuts may be extended to June.
CRUDE OIL--RESISTANCE--Basis February is 2680.
SUPPORT--Basis February is 2557, 2265, 2365-2354, 2292-2284, 2199, 2157, 2125, 2100, 2040, 1995, 1964, 1905.
RECOMMENDATION--No trade.
HEATING OIL--RESISTANCE--Basis February is--6755, 6825, 6900.
SUPPORT--Basis February is 6500, 6380, 6340, 6200, 6160-6130, 6070, 5935-5915.
RECOMMENDATION--No trade.
UNLEADED GAS--RESISTANCE--Basis February is 7160.
SUPPORT--Basis February is 7070, 7010, 6760, 6595, 6538, 6440, 6260, 6110, 6020, 5913, 5790, 5648.
RECOMMENDATION--No trade for now.
NATURAL GAS--The discount of cash to futures suggests an uphill battle for natural gas unless it gets much colder in the Midwest. Cash is improving, but likely not enough to turn the market around for now. The chart is negative.
RESISTANCE--Basis February lies near 2470-2480, 2560, 2650, 2720, 2770, 2870-2900, 2995, 3040, 3100.
SUPPORT--Basis February lies near 2345, 2285.
RECOMMENDATION--No trade for now.
M. Steven Morgan