Phil Flynn's Energy Report
A comprehensive look at the energies market by industry leader Phil Flynn

• A major achievement in Iraq was overshadowed temporarily
  A major achievement in Iraq was overshadowed temporarily as Turkish bombs fell over the weekend. The IEA reported that Iraq is now producing 2.3 million barrels a day which according to the Financial Times has outstripped pre-war levels for the first time. The numbers show that Iraq is now producing 2.3 million barrels of oil, up 1.9 million from the outbreak of war in 2003. Just last January Iraq's production was pegged below 1.7 million barrels of oil a day during the dark days of the war. Why this sudden success? Well, it is because the surge in Iraq is working. Just today Lt. General Ray Odiemo, the second ranking US General, says that violence in Iraq is at its lowest levels since the first year of the American invasion. In fact he said that the violence last week was the lowest ever. This, according to AP, is opening a window for reconciliation among rival sects. But sadly there are still some issues in that region. On Sunday Turkish planes bombed northern Iraq targeting Kurdish rebels. This was the second operation this month. AFP says that the rebel Kurdistan Workers' Party (PKK), which has waged a deadly insurgency in southeastern Turkey since 1984, maintains a network of rear-bases in the rugged Qandil Mountains near where the borders of Iraq, Iran and Turkey meet. For oil traders the worry is the northern pipeline that has run as much as 300,000 to 400,000 barrels of precious crude a day but has been sporadic. Obviously if the tensions increase it could be cut off. This comes at a time when Iraq's oil industry is getting ready to boom and has been one of the major factors why oil pulled back from near record highs. Progress in Iraq and the War on Terror is a bearish factor for oil. Obviously the other issue is the economy. Hot inflation readings last week are raising fears about just how much wiggle room the Fed has left in any rate cutting. Oil prices led the surge but food prices won't be far behind. Wheat made an all time high overnight as US exports are soaring and the cry beans in the teens are being heard from the pits in Chicago. Talk of recession and stagflation but what oil traders are seeing is a drop in demand due to the swift kick in price. It is a winter wonderland in Chicago. Though it's cold, it is not below normal. It is winter in case you forgot. So just pull your laptop near the fire and sign up for your free trial of Alaronenergies and get signed up for the Phil Flynn Blast. Call me today at 800-935-6487 or email me at pflynn@alaron.com. Open your account to trade energy or grain or any futures or options on futures. Sell February crude at 9200 - stop 9480. Sell January heating oil at 26500 - stop 27500. Sell January RBOB at 23500 - stop 24500. We're long January natural gas from apprx 703 - stop 680. Have a GREAT day!
• The Economy is slowing but demand for oil goes up?
  \ The Economy is slowing but demand for oil goes up? Maybe the stock market isn't totally buying what the Federal Reserve is selling but the International Energy Agency is. And buying it hook line and sinker. Alan Greenspan is raising the odds of a recession but the IEA is lowering it. The IEA says that world oil demand will rise by 2.1 million barrels per day up 200,000 barrels from its previous forecast. Huh? Oil, after a major rejection of the $95 barrel price level, is making a come back based off these rising expectations for oil demand. The IEA is raising its demand forecast. That's right, you heard me correctly. Raising it expectations for demand giving the oil bulls more hope that they will see that $100 print before the end of the year. The IEA is raising demand in the Middle East and says the world is resilient to high oil prices. Maybe they are hoping to support oil so OPEC will keep pumping it. Usually the IEA underestimates demand but now I think they are overestimating demand. The January option expiration was exciting. Oil went contango and back to backwardation. Sort of like the game twister. The lack of contango is because of less geo-political risk. The Saudis that have already done a great job with security according to Reuters and is building up a special 35,000-strong rapid reaction force to protect its energy installations from attacks. That is bearish for oil as the risk premium continues to come down. Just take those old records off the shelf because there may not be a new record for oil in 2008. If you like records, oil traders will have to live in the past. Year after year oil has made record highs but this year it's not that likely. Every year since 2003 oil has broken the record high set the year before. This has been so common in this era of energy that new highs every year for many traders are already just a given. Yet in the year ahead I doubt that the record high we establish 2007 will be broken in 2008 unless we get a real cold winter or some unusual geo-political event. Now I know what some of you are thinking. That perhaps I am some kind of frustrated oil bear that is out of touch with market realities but let me tell you that is not the case. Even though I am bearish for 2008, over the last few years there is hardly anyone out there that has more credible long term bullish credentials. Not only have I have been a long term bull throughout this entire decade, I was bullish before bullish was cool. Anyone remember when crude oil was $10.00? Being an oil bull these days is not a bold position to stake out but when I originally started to state the bullish case for oil, it was not exactly a popular position to take. I was one of the first analysts that warned about the effect of China on the world commodity prices. How oil in late 1999 hit bottom and signaled a long term shift in the commodity cycle and that oil prices were going to move sharply higher. And how higher oil prices were not signaling doom and gloom but really the improvement of the standards of living of people all over the globe. That high oil was a good thing that did not signal a recession but strong economic growth. Last year for the 2007 outlook, I compared the run in crude oil to a sports dynasty and predicted - correctly - that oil would set a new high. I predicted oil would hit $85 in 2007; a position I was criticized for when oil dropped to $50. Of course not only did oil hit $85 but exceeded it. Now the same people who said we would never see $85 are so bullish it's crazy talking like $110 $120 and beyond. Yet for this new year I think that oil will not exceed the 2007 levels unless we get some type of event. (War, hurricanes, etc). Oil is due for a breather in 2008 and why not, because it has been on one incredible run. The reason I believe this is because the way the US credit crisis affected the price of oil and the outlook for demand. Demand is rising but not as strong as projected and a little known fact that daily world oil production in 2007 hit an all time high of 86.43 million barrels a day last October. Still, oil flirted with $100 a barrel but it is unlikely we will see that level in 2008. In fact I might contend that oil would have never got to the high nineties in 2007 if it were not for the fact that we had the credit crisis in the first place. Oil put on at least $10 a barrel after the Fed and their surprise 50 basis point rate cut in October. That tanked the dollar and propped up oil. Commodity funds bought oil and hedged the dollar with oil and the market soared. In other words the Fed basically tacked on an extra $10 a barrel in 2007. That 10 dollars the Fed added was the same $10 we would have gained in 2008 had it not been for Fed action. You see speaking in rough numbers oil has been adding $10 a year even with all of the historic demand growth that we have had over the last few years. (Yes I know about peak oil etc.) But even with all the bullish arguments $10 was the number. This year was no different until the Fed worked its rate cutting magic. When the Fed intervened we added $20. So the Fed, because of their rate cut, probably gave us all of next year's move in the last few months of 2007. Because we added an extra 10 dollars in 2008, we will be hard pressed to extend this market much higher. Demand growth in 2008 will be questionable due to the crisis but production should rise. Less demand growth and more production probably means lower prices unless something bad happens. We will see a drag in demand due to economic problems but the bearish forecast is not all about bad news. It is also because the world looks to be a safer place in 2008. The best part of my outlook for 2008 is the fact that geo-politically speaking the oil market in 2008 looks much safer than it has perhaps since the attacks of September 11 2001. In the 2007 outlook I wrote that, "The market spent most of 2006 living in a state of fear that was sometimes real and sometimes imagined. It was a year of geo-political tensions with Iran and war in Middle-East." This year many were convinced that we would see a war in Iran and that Iraq was going to be a lost cause. (Just ask Senator Surrender Harry Reid). Yet the surge in Iraq has worked and it should mean more oil production from an unexpected source - Iraq. Al -Qaeda, though still a threat, took massive losses in Iraq. Despite the boasts that they would destroy oil facilities they have yet to stage a successful attack on oil. The market is less fearful of Al-Qaeda in 2008 than they have been in a very long time. Iran drove oil higher on fear in 2007. They took British sailors hostage and released them and caused much fear and loathing in the oil market. Yet not