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The Energy Report from PFG Best:

Do you remember the good old days? You know like the this past quarter when it seemed stocks went up every day? Give me my quarter back! Well folks those days may be just a pleasant memory.

The new quarter started with an October stock slide leaving oil traders to once again question whether bullish stocks is bullish or is bullish bearish. In other words, should the oil market follow stocks lower because of decreased demand fears? Or if we get an October stock market crash is it bullish oil because the dollar may stay weak? Oil seems to be entering October with a bit of an identity crisis as the new quarter raises more questions. The main one being what drove oil this week and what will drive it in the next quarter.

The moves this week were out of the ordinary with many of the moves appearing to be out of step with recent factors. Perhaps a lot of it had to do with the changing of the quarter with position squaring and repositioning and such, yet there have been more storylines in oil than a daily soap opera. We had beginning of the quarter fund buying that kept oil rallying despite the fact that the stock market was melting. It was almost like oil traders have lost their focus. As the great stock market rally of the last quarter quickly becomes a fading memory, the oil market is trying to find something to believe in.Yesterday as weak economic data stared them right in the face, traders had to determine whether weak economic data was indeed bearish or bullish for price.

There was also the Iran factor. Oh we are shocked that Iran was hiding things from the international community. That gave the advantage to the UN in talks yesterday. The question is: who really came out ahead? The AP reported that Iran and six world powers put nuclear talks back on track at a landmark session that included the highest-level bilateral contact with the U.S. in years. The meeting ended with a pledge to meet again this month, but disputes surfaced shortly after its conclusion indicating a rough road to agreement ahead. Iran accepted a demand Thursday at the talks in a villa outside Geneva to allow U.N. inspectors into its covertly built enrichment plant, a move that appeared to defuse tensions that had been building for weeks. Yet by talking isn’t Iran just buying more time? And while the world inspects an inactivated uranium enrichment plant don’t you kind of wonder what is going on at the one that is active?  In the meantime, the oil market won’t have to worry about a cut-off in oil supply for awhile.

Another interesting take on the weird movements in oil actually was suggested by one of my readers. He seemed to think that the recent buying in oil had to do with politics and the CFTC. He seemed to think that the CFTC’s approval of Scott O’Malia as CFTC Commissioner reduces the risk that the agency will force aggressive position limits on oil. To give you a little background, Mr. O’Malia was originally nominated to the CFTC by President George W. Bush. Yet his nomination was blocked by Sen. Maria Cantwell a democrat because she felt the CFTC was not doing enough to crack down on oil speculation. Mr. O ‘Malia is seen by the marketplace as more of a free marketer and will provide balance to the debate over speculation by filling the fifth and final seat on the CFTC commission. He was re-nominated by President Obama and this time went unchallenged by Sen. Cantwell.

Hopefully this will provide some balance as the agency’s new chairman Gary Gensler seems biased against the speculators argument that they did not cause the spike in oil price but only reflected the massive uncertainty surrounding the greatest economic crisis in recent times. As the agency moves to reign in speculation, it is hoped that this confirmation of O’Malia will make sure the agency doesn’t go too far in a rush to judgment. I do not think that is why the market rallied. Yet it is an interesting take on what has been interesting market movements.

Yet when in doubt go with the supply. At the end of the day with suspect demand growth and uncertainty on the amount of stimulus that will be pumped into the system, eventually massive over supply will take its toll. We maintain our bearish outlook and look for the market to come down hard in this final fiscal quarter.

Phil Flynn
PFGBEST Research Team

We’re short November crude from apprx 6850 – stop 7178.

Sell November Heating oil at 18300 – stop 18500.

Sell November RBOB at 17820 – stop 18200.

Sell November natural gas at 499 – stop 510. Or buy November natural gas at 423 – stop 407.

Source: PFG Best