Mexico Hedging and Energy Option Selling

Last week the Mexican government announced it had spent $800 million dollars buying crude puts in the $63 to $65 range. When triple digit crude prices appear to be on the doorstep, why did they place this hedge? The simple answer is that they are protecting their fiscal budget.
This is the proper and good use of hedging. Not to make additional profit, but to ensure an already budgeted profit.

Energy traders with a conservative risk tolerance should take heed of this action and look for opportunities to be sellers of put options, as there will be plenty of market participants similar to the Mexican government looking to buy options.

Although we may continue to see more pull back in energy futures as December winds down, especially with refiners looking to sell inventories to avoid ad valor em taxes and traders locking in year end profits. The outlook for 2011 is for energy to be well supported on any pullbacks allowing put option sellers to enjoy a profitable premium income stream.

The IEA and 78.6% Fibonacci

For the past several weeks the news has all been energy positive with big houses and OPEC raising energy demand forecasts for 2011. The International Energy Association (IEA), however, casts a different light on their forecast. Traders will do well to take heed.

The IEA released a tempered outlook for energy demand in 2011. They are foreseeing slower growth in China leading to a lower demand. Crude prices are being pegged to a range of $75 to $85. A sharp contrast to OPEC's $85 to $95 range. And even larger contrast to Goldman Sach's 2011 average price of $105.

The hope of a US economic recovery along with the Fed pumping the US economy with liquidity through a $600 billion bond purchasing strategy, has given traders the green light to add to long positions, driving crude past $90.

This has allowed traders to retrace the ever important 78.6% retracement level. A technical pull back is likely off this closely watched Fibonacci number. However, ultimately traders will need to heed any interest rate hikes coming out of China that will slow their economy and ultimately energy demand.

Catching the Elliot Wave

R.N. Elliott masterfully combined security price movements with human sentiments to come up with a technical charting technique now known as the Elliott Wave Principle. His thesis is simple. Prices react not only to supply and demand fundamentals, but also to greed and fear psyche.

There must be more than a few high volume crude traders following the Elliott Wave patterns this year, as text book waves are clearly marking crude's price direction.

Elliott Wave theory likens price movements to ocean tidal patterns. Price movement flows are charted in 5 low and high tide ebbing patterns. Pretty cool. The problem is that in the short term this writer has not been accurately able to see the beginning and end of each wave. However, longer term the picture evolves more slowly and clearly. And thus more useful for trading setups.

This week crude peaked at high tide wave B at $88.8 (78.6% retracement) and consistently withdrew or ebbed off high tide wave B. This sets up a larger out going tide C move lower. $85 is a key congestion support area going back to May 2010. A break below support brings crude down to lower $80's.

House traders will be carefully monitoring this out going C wave tide to try and hop on the low tide and ride it up shore on wave D. Told you this was cool stuff.

Last week the news was full of stories on higher crude prices. These stories are likely to be true in the longer run, but for now crude appears to be obeying R.N. Elliott's Wave thesis for a bit of a pullback.

Ethanol and the Divided US Congress

Ethanol as an energy source has always needed government subsidies to exist in the marketplace. Now that Republicans control the House of Representatives, some major ethanol tax breaks for producers and blenders may go away for good in 2011.

In the long run doing away with the ethanol tax benefits will be a good thing. Using our food supply to run our vehicles was never a wise use of limited resources. And hopefully more research will be devoted to more productive and cost efficient alternative energy sources.

Will the recent increase in allowable ethanol blending formula to 15% have any affect on helping the ethanol production industry stave off imminent layoffs? Not anytime soon. Vehicle warranties are voided if gasoline is used with more than a 10% ethanol blend. So until vehicles adapt to the higher blends, gasoline marketers will not take the chance on selling 15% ethanol blended gas until they are comfortable law suits will not follow this new product.

With an expected decrease in US corn harvest, falling US dollar, and slowly rising US fuel demand, ethanol is likely to hold spot price support and according to Morgan Stanley, will average $2.59 per gallon next year. Ethanol like all other commodities will likely continue on the bid supported by the $600 billion Fed bond purchasing.

Crude and the Euro Standing at the Crossroads

Nothing frustrates an energy investor more than doing the homework on the fundamentals only to be outdone by technical price movements. All commodities eventually return to their supply and demand fundamentals, but the short term seemingly random price swings are driven by the technicals. With crude and the euro at critical technical levels, traders will need to watch for breakouts or containments to determine when to buy or sell.

The strengthening euro has been the main reason crude has been able to ignore over supply fundamentals and churn its way from $65 to $84. The euro is now facing strong resistance on the monthly charts, unable to plow its way past 1.4150 vs the US dollar. Euro bulls will have a few more goes at this barrier, but should it hold, the bears take control driving the US dollar higher and taking crude lower.

Crude also has been facing rather strong resistance unable to break and hold the $85 level. Having held its $81.45 200 day moving average on Friday, crude bulls will go into Monday with some momentum to try and take out this monthly resistance barrier.

Should the euro and crude resistance levels hold, be ready to position short positions for the ride lower. The fundamentals of oversupply will then kick into gear and the bears will be partying like its September 2008.

The Energy Complex and China's GDP

China, recently hailed as the largest energy consuming nation, always has the attention of energy traders when they release important economic data. This week traders will be flooded with economic reports flowing out of China. The culmination of which will be their gross domestic product release on Thursday.

Remarkably resilient, China has maintained double digit GDP growth despite a worldwide slowdown. However, the Shanghai Securities Journal is actually looking for a bit of a pull back in Q3 GDP from China. They are forecasting 9.9% GDP for Q3 and are anticipating 2011 yearly GDP to fall to 8.9%.

Should energy traders start anticipating a bear market trend reversal? Hardly. The Chinese government will be thrilled to see a slight downturn in GDP as this will eliminate and further need of economic policy tightening, allowing future growth to continue without major inflation concerns.

Should the Shanghai Securities Journal's prognostication of a down turn in China's GDP be accurate, crude and refined products likely to sell off. Good pricing values for long traders will likely become available when support levels are reached.

Virtually Weatherproof Petroleum Products

One of the nice benefits of being an energy trader is not having to worry about the weather wiping out or increasing supply, (hurricane season not withstanding). Rain or shine, hot or cold, crude oil continues to be pumped. Gas and diesel yields are not dependent upon rainfall amounts. Refineries continue to produce regardless of weather conditions.

While the agricultural commodities have had wild price swings this year, crude has kept a very tight $13 trading range since May between $72 and $85. The reason is very balanced fundamentals of slow growth industrialized economies and high supply stocks for the bears, and for the bulls, weakening US dollar and strong growth economies of China and India.

We are now in a seasonally slow period for energy with the end of the driving season and another month away from heating season to kick into gear. This should help to dampen crude's latest run to the high end of the trading range.

With these ideas in mind, traders will do well to continue selling option strangle positions and enjoy the cash cow for at least one more month.

Stronger Euro Providing Fuel for Higher Energy Prices

The United States and Japan seemed to have recently entered a race to see which country can make their currency the weakest in the world. The US implicitly with low targeted interest rates and forecasted bond purchases. Japan explicitly with outright foreign exchange purchases.

The currency emerging strong from these governmental currency strategies is the euro. This is not good news for those hoping for lower energy prices.

Key technical signals, especially the head and shoulders on the US dollar index chart, are leading many longer term trend traders to put on or add to long euro positions. The euro will likely continue trending higher for the next 7 to 12 months.

Unfortunately, the main reason the euro will not trend longer than 1 year will be due to another worldwide recession causing traders to flee back to the safety of the US dollar. The recession will be partially caused by higher energy prices.

The consequences for crude and its refined products will be slowly building price inflation. We are likely to see crude break out of its trading range to pop its head above the $90 level. Participants will remember that it was a strong euro the took crude to $149.

Bleak Outlook for Ethanol Blending Economics

Refiners and wholesalers have enjoyed a few good years of adding extra profit margin to each gallon of gasoline sold by simply blending conventional 87 octane gas with ethanol. Things have quickly changed over the last few months with sky rocketing corn prices shrinking blending profit margins dramatically.

The blending economics do not appear to be improving anytime soon. The 2010 US corn crop yield projection was trimmed again on Friday, sending corn futures to a yearly high trading above $5. This has widened the backwardation of ethanol futures sending the near month CBOT to 2.14, making it on average .15 higher than conventional 87 octane spot.

To make matters even worse, congress is under pressure to do away completely with current biofuel blending credits. The credit is just large enough at today's ethanol prices to make blending slightly profitable.

With wheat prices soaring, farmers will be incentivized to plant more wheat next year than corn, all but ensuring a lower supply of corn for next year. Fuel wholesalers not needing to be in the ethanol blending business should exit now, or at least as soon as contractual storage obligations permit.

Ted Nugent and Strangling the Energy Complex

Trading advice from legendary guitarist Ted Nugent, "I got you in a stranglehold baby..." Not a bad strategy for this market Ted.

For the past year crude has been stuck in a $65 to $84 trading range. Not an easy task to make money consistently in this continuous chop fest. Algorithmic program trading set to tight take profit and stop loss zones, keeps the price wave action tumultuous.

Strangling the market is simply selling same month crude option out of the money calls and out of the money puts simultaneously. Setting strike prices above and below the $19 trading range and moving out several months on the expiration, has been an excellent low risk revenue generating strategy.

With expectations of continuing slow but steady worldwide economic growth, there is really no fundamental or technical reason not to roll over these strangles for the coming year. Watch those parameters closely. If the market breaks to the upside or downside of the past year's trading range, volume will pick up dramatically as traders position for a new trend.

QE2 and It Ain't the Queen Elizabeth

Energy traders placed their bets with Ben Bernanke on Friday that he will keep the economy moving forward even if it means another round of quantitative easing (QE2). As much as the Fed would rather stay on the sidelines and let the free market work, stubbornly high unemployment may force the Fed to expand their balance sheet, buying more bonds to drop interest rates even lower.

Energy bears had a nice run the past few months, riding the falling price of crude from a near term high of $83 down to $71. Traders are now trying to make their best guesses as to how demand will be shaping up for 2011.

Everyone is well aware how well supplied markets are for crude and its refined products. Contangos continue to widen, with refiners preferring to arbitrage prices by storing crude instead of refining into current low margin products.

Energy bulls have been relying on China to offset anemic fuel demand. The US, however, is still the leading fuel consumer and will be a drag on futures if employment in US cannot get below 9%.

The Fed can only do so much. Entrepreneurs need to have confidence and surety that invested capital will generate sufficient returns. Perhaps confidence will return after the November elections. For now the safest trade is to wait for energy futures to hit monthly resistance levels and then join the bears for profits on the short side of the trade.

Widening Contangos and Crude Evaluations

Energy traders incorporate a wide variety of trading tools to estimate future values of crude and its refined products. No matter which commodity one is trading, nothing is more important than understanding whether current or future demand is being given a higher valuation for the given commodity.

Other than being lucky in guessing future valuations, how does a trader know right now whether current prices will likely go higher or lower? The answer is in looking at whether suppliers are bidding up outlying month futures and storage cost pricing. Ultimately these prices are driven by current vs future demand.

Crude outer month futures prices have been on the increase in relation to near month pricing. Traders use the term contango, not sure why but it is what is, to describe any commodity whose current prices are less than future prices. When prices spreads between near and outer months continue widening, near term prices are highly likely to continue falling.

Crude futures normally, or at least historically, will trade in a backwardation price structure. This enable refiners to refine crude as refined products prices rise. Refiners profit margins fatten in this type of environment. In contango, refiners find themselves in a shrinking profit margin due to falling refined product prices. This results in refiners delaying or reducing their crude purchases, hoping product prices may be higher in the future.

With the euro on the verge of collapsing below $1.27 support, traders will be wise to observe the widening or narrowing of crude the contango, as trading plans are executed over the next few months.

Absolute Monetary Policy Clarity Now From the US Federal Reserve

The US Federal Reserve Open Market Committee is the single most powerful entity affecting investment decisions across the entire world. For the past twenty years or so investors were never really quite sure of the Fed's monetary policy because the Fed's focus was on targeting interest rates and/or targeting reserves. This left investors trying their best to interpret Fed comments on their committee meetings to determine these targeted ranges.

On Tuesday the Fed announced it has changed its policy to targeting its balance sheet. Hallelujah!! It is now a simple matter of doing the math as to whether the Fed has expanded or contracted its balance sheet to determine whether the Fed is easing or tightening monetary policy.

The US dollar was off to the races once the market truly understood the implications of this momentous decision. Unfortunately, those long energy futures were hammered this week mainly due to the swift fall of the euro on the heels of this change in Fed policy.

Congratulations to South Carolina's Ben Bernanke for driving home the need for change to the other members of the Federal Open Market Committee! The TV business news channels will surely miss parsing Fed meeting communique, but for investors who need to know exact monetary policy direction, this is a great win for the US and global economies.

Don't Turn Out the Lights Yet

One of my favorite childhood memories was watching Monday Night Football back in the days when Frank Gifford, Howard Cossell and Don Meredith were the commentators. Hearing Howard and Don exchanging verbal jabs was a weekly treat. Seeing how this show came on a school night, my parents would not let me stay up past half time. Unless of course, our local team happened to be featured that evening. When a team was losing badly going into the fourth quarter, Don Meredith used to sing the words of an old country song, "Turn out the lights...the party is over". Crude bears may be tempted to begin singing this song to their bull counterparts after the release of Friday's US Jobs data. Bulls ought not to listen.

Sure the Jobs report on Friday was dismal. Not a big surprise. Companies in the United States want to see demand for goods pick up before they will hire new employees. In the meantime, companies are finding more ways to automate labor intensive processes. Not a pretty picture for recent college grads or those still trying to find work from the Great Recession. However, the increase in productivity enables companies to quickly meet demand for goods as this demand slowly but surely increases.

Crude bulls are well aware we are approaching the meat of hurricane season. Traders are also taking note on the rapid rise in wheat prices pulling other commodities higher. The euro too is lending support to energy futures.

So, while $100 crude will need to wait, barring some type of catastrophic event, $80 crude may be a good entry point to ride the trading range back to $85.

The Smartest Trader In the Room

Surprise! Surprise! US economic quarterly growth slowed to 2.4%. If that news was not bad enough the US government also released three year economic data yesterday showing the recession was much worse than previously reported. Not the kind of input that would inspire energy bulls, yet the market took the news in stride with all components of the energy complex closing higher.

Equity investors also paid little attention to the rearward looking data. July turned out to be the be best month of the year for equity investors.

Bond traders, however, are a bit more hesitant to jump on the better future ahead band wagon. Bonds are still ridiculously expensive, with the 2 year hitting historically low percentage yields.

So who is the smart guy in the room? Perhaps they all are. Short term bond yields have an anchor courtesy of the Fed's low to no interest rate target. Still deftly afraid of deflating hard assets and poor job creation.

Equity traders get the fact that the US consumer are currently retrenched, but are looking ahead to continued world wide growth driving large cap stocks, which will eventually lead to these companies hiring more to meet growing product demand.

Energy traders are seeing increased crude imports and higher refinery run rates in China, giving them confidence demand will continue to eat away at record supply levels. US gas demand has risen to pre-recession levels, also contributing to bullish bets on refined product futures.

We are living in a unique era that has little precedence to base historical trading pattern ideas. Each sector is trading on its own fundamentals. Being a smart trader mean focusing on your sector and not trying to correlate trading positions with other sector traders.

Potential Gulf Port Shipping Lane Delays

So far the Gulf oil spill has not had a major effect on Gulf port shipping lanes. A complete closure of the shipping lanes is unlikely, but would be disastrous for the price of all commodities being shipped into the United States.

Any ships encountering crude on their hulls will need to be delayed as the hulls are power washed to eliminate oil entering the Mississippi River. The more ships that encounter oil flows will make the delays longer.

The Gulf states were fortunate that tropical storm Bonnie was unable to generate hurricane strength winds. However, the winds are still strong enough to direct remnants of the spill into the shipping channels.

Traders should tune to Coast Guard reports for any indication that shipping delays are occurring due to crude entering navigation channels.

Technical Selling Keeping Crude Below $80

May crude futures looked to be on a relentless climb to $90. A few of the large trading houses were setting sites on $100 crude. It peaked, however, at $84 in May and has not seen the $80 handle at all in June or July. Technical traders enjoy these trading resistance levels as it makes it easy to place trading on auto-pilot, allowing computer programmed algorithms to dictate buy and sell decisions.

The same technically driven trading strategies were a big reason for yesterday's large sell off in US equities. The DOW industrial average could not penetrate 10,400 resistance, triggering automatic sell signals driving stocks down over 250 points.

Traders will continue repeating the same strategy of selling resistance levels and buying support until some major fundamental event creates incentive to push through monthly trading ranges.

A few of the fundamental events to keep and eye on that would have the power to drive crude back onto the $80 handle are: a major hurricane striking off shore Gulf oil rigs, much better than expected quarterly earnings from large US corporations with strong forward earning guidance, the euro climbing above major resistance at 1.32, or the Baltic Dry Index climbing above 3,300.

Sittin' on the Dock of the Bay Watching a Baltic Supra Panamax Roll Away

An excellent gauge of the strength of the world economy is the amount of iron ore being consumed. The reason is simple. Iron ore is a key ingredient in steel production. The amount of steel being produced is directly correlated to long term capital expenditures, which drives economic growth.

Tracking iron ore consumption has been a passion for several commodities traders for many years, as a sure fire tell-tale of world economic strength. It is most easily done by following a bulk goods shipping lease freight rate indicator, the Baltic Dry Index (BDI).

The main product of bulk dry good shipping is iron ore. When economies are expanding iron ore shipments will be on the increase as steel production rises. When economies are slowing down demand for steel slows and consequently demand for its main ingredient, iron ore, will slow down as well.

Traders keying off the BDI were able to exit long energy futures trades profitably at the end of 2007 and beginning of 2008, as the BDI peaked and began falling. The BDI then gave the OK signal to go long in March and April of 2008 as the BDI support levels held and began rising in the midst of the global recession.

In the past month the BDI has fallen 4,000 points. Energy traders observing this, sold out of long positions fearing growth in China was slowing dramatically. On Friday the BDI closed at 1,940. Well below its 200 day moving average of 3,125.

One factor weighing on recently depressed shipping rates is the number of new Supra Panamex ships entering the dry goods fleet. Traders, however, will be even more confident of the BDI's ability to gauge whether world economies are improving or stagnating. The added fleet supply will give resistance to the BDI's ability to rise above its 200 day moving average. Should it climb back above 3,125, be careful not to be sitting on short strategy crude, heating oil or gas futures.

Get Ready 'Cause Here They Come

Forecasts for this hurricane season to be one of the busiest ever are showing early signs of accuracy. Tropical storm Alex became our first North Atlantic basin storm yesterday and is rapidly heading for the Yucatan. Several other tropical disturbances are forming off the coast of Africa and Eastern Caribbean. Is it too late to be prepared for potential price spikes on gas and diesel?

Fuel buyers are often hesitant to raise their immediate fuel costs by enacting a futures or derivatives hedging strategy. What needs to be understood is that these minor costs are lowering the risk of major losses should severe supply disruptions occur during the hurricane season.

On Friday RBOB and distillate futures jumped .055 and .075 on short sellers buying back their positions, not willing to risk major losses should Alex become a major hurricane and steering a path North. Back month contracts were also moving higher on hedgers buying futures and options contracts enabling them to add to profit margins should the products continue moving higher.

A solid hedging strategy in preparation of hurricane induced higher gas and diesel prices is to simply by fixed forward contracts and minimizing the price fluctuation risk by buying put option contracts. Of course timing is everything. Fixed forward contracts need to be locked in when prices are falling and put options need to be purchased when premiums are least expensive which occurs when futures are rising.

The difficulty in enacting the above hedging strategy is that it is against human nature to lock in a fixed price when prices appear to want to keep going lower. Using technical analysis to determine monthly support and resistance levels helps overcome the natural resistance to lock in on a down trend, giving the fuel buyer confidence the right decision is being made. Just as difficult is not paying too much for option premiums and waiting for an uptrend to begin before purchasing the put options.

Many fuel buyers and even some producers of refined products, steer away from any hedging strategy thinking it is too costly and administratively difficult to monitor. The extra time, effort, and expense actually gives great price and supply risk protection enabling a distributor to continue operating cost effectively during supply disruptions, when competitors are selling at a loss.

Natural Gas Traders Flirt With "Widow Maker"

Traders who thrive on ferocious price movements crave the high octane volatility of the natural gas futures market. Few other commodities display the whipsaw action that makes nat gas one of the most difficult yet potentially rewarding commodities for speculative traders. Last August it lost 40% before jumping 93% in September. Having an effective hedge to offset potential instant portfolio destruction is essential.

Nat gas spec traders favor fundamental seasonal trends. The problem is that they trade the seasonal trends using logarithmic driven technical analysis. Since many hedge funds are playing the same strategy, money flows in and out like ocean tides. Getting caught out in high tide when the money flows have shifted to low tide has sunk several big name funds.

One of the most dramatic nat gas trading shipwrecks occurred in 2006 when Amaranth Advisors went all in on the seasonal trade of inventory builds from winter to spring known by market participants as "the widow maker trade". Fundamentally demand falls from winter heating season to spring. The problem with this trade is everyone knows about it and is playing it short, if they all head for the exits on any unexpected increase in demand for nat gas, the shorts have to buy their way out of the trade pushing the futures higher and creating more losses for anyone remaining short.

It is always best to enter these futures positions by adding insurance to the trading strategy with, in the case of a short nat gas futures position, nat gas call options. These options can be bought inexpensively at the end of winter, when call premiums are falling. Futures traders often prefer not to eat in to potential trading profits by purchasing options. The peace of mind the hedge brings, however, is well worth the cost.

Crude Futures Giving a Good Rocky Balboa Impression

Having received a knock out punch from its yearly high of $88, crude futures managed to pick itself up off the mat at an intraday low a few weeks ago of $64 and fought its way back to a close on Friday of $74. Congratulations to everyone, Dennis Gartman, in particular, who foresaw the collapsing euro and positioned short on crude accordingly. Will the downward trend continue, or has crude carved out the proverbial bottom?

The energy complex futures are a play on world economic growth. Crude made its precipitous fall when hedge funds began worrying that debt problems in Europe would derail world growth and subsequently world demand for energy. Hedge funds began moving as a herd in early May, selling out of long ETFs and futures positions and either going short or playing it safe with their capital by sitting on the sidelines.

With strong economic data coming out of China this week, capital flowed back into energy, as traders saw value in cheaply priced crude, distillate and gas futures. Even the euro began responding last week to positive to successful European bond sales. US equities also showed positive signs that it too has created a technical bottoming formation. These are all evidence that the crisis is over and demand will begin eating away at record energy supply levels.

Traders are likely to be cautious this week and prefer waiting for crude futures to dip back to the lower end of the near term $69 to $75 trading range before adding to long positions. However, volume will increase on the lower end helping to ensure that a bottom is in place and allowing more aggressive traders to load up on any pull backs this week.

China's Strategic Energy Plan

Petrochina, Sinopec and CNOOC are China's three mega state owned mega petroleum companies. These companies have been on a buying spree since February 2009, crude's low end of a multi year trading range. Flush with cash and understanding that China, in ten years will have depleted its own crude resources, these state supported entities have been on a crude supply buying tear, locking in as much petroleum resources as possible, by offering loans and drilling technology with the help of the Chinese government.

China well understands that although new energy substitutes are being developed, these new fuel technologies will likely not be available for twenty or thirty years. Locking in long term supply at current prices places China in a highly favorable strategic advantage.

Currently the United States is dependent upon China to buy our bonds to fund our ever growing debt. In the not too distant future we are likely to become dependent upon China to supply us with fuel to keep our country operational.

Crude near month futures closed today near $71. With depleting supply and increasing demand it is not unreasonable to expect crude 2012 futures to be trading in the $200 to $300 range. At those prices China has gained a major strategic advantage over the United States and places us at a major security risk.

The Obama administration needs to be thinking immediately of how we can incorporate our most abundant fuel resource, natural gas, into our mainstream fuel supply. Failure to take action now places our future into the hands of the Chinese government.

Euro Support Levels and Crude Future Positioning

It seems years ago, but it has only been seven months since the euro was reaching new record daily highs against the US dollar, eventually tapping out at $151.43 on November 26, 2009. The currency has been on a steady decline since those heights and plummeted to $121.32 just this week. For much of the time the euro was falling crude futures kept on rising. These past few weeks have seen a swift 20% correction in crude, bringing crude futures back in line with the reduced value of the euro.

The euro has appeared to come full cycle from everyone wanting to own it, to everyone wanting to sell it. Now that crude has made an adjustment to the lower euro, the next adjustment will be made by European Union exports. The lower currency is just what the doctor ordered to help Europe get out of its debt crisis. Germany in particular with its high reliance on exports will benefit greatly by the reduced costs of German goods. I would not be surprised if the European Central Bank tries to push interest rates to 0% to further deflate the currency.

With German factory goods leading the European Union in the months ahead out of economic stagnation, the consequences will eventually be the raising of interest rates, followed by an upward trending euro. This of course means crude futures will need to adjust higher to compensate for a strengthening euro.

The timing of how quickly this scenario will play out is not definite. Markets always seem to over shoot until there are no more interested buyers or sellers. We may have hit the bottom in the euro sell off, but it is more likely that support will be found on the $115 to $120 levels. If that is the case, crude likely to keep heading lower until it begins to attract heavy buying in the $65 to $60 area. We are likely to see more traders begin taking off short positions and reversing course to the long side over the next several weeks.

Oil Spill or Gusher? Have Energy Traders Become Complacent?

The BP drilling disaster in the Gulf of Mexico was originally predicted by Goldman Sachs to create major havoc with shipping and drilling in the Gulf, skyrocketing crude to $100. The market's reaction was to push crude to yearly highs of $87. Weeks went by and not even a drop showed up on Gulf coast beaches. On Friday crude closed under $72, as crude aligned itself with the falling euro. Traders likely have become too complacent with what yet may unfold with the continuing flow of crude.

The photos and film footage streaming from the media the past week appear to show a well coordinated and controlled effort to harness the crude and burn the oil. This has been effective due to perfect weather and easterly sea winds keeping the flow away from major shipping channels. We are now heading into the rainy season for the Gulf where afternoon thunder storms routinely kick up waves 10 to 12 feet. Crude will easily flow under containment booms in this type of weather. Wind direction began changing yesterday, causing the crude flow to move in a westerly direction on a course for Louisiana and the all important offshore petroleum loading platform known as the LOOP.

Of course weather conditions would not matter if the flow of oil could be slowed or stopped. The greatest hope to stop the flow is to drill into the current path and fill with cement compound. This operation will take several months to complete.

There also appears to be a wide discrepancy as to the actual amount of crude flowing. BP only recently released film footage that some are estimating show the flow to be 70,000 barrels per day. If true this eclipses by a wide margin the Exxon Valdez spill which was estimated at 250,000 barrels. Researchers at Massachusetts's Wood's Hole Marine have the technology to properly measure the flow, but have been refused permission to deploy their equipment by both BP and the US Government.

Should a worse case scenario evolve and storms begin driving the crude flow to major shipping channels, not only will crude, gas and diesel spot prices sky rocket, other imported commodities such as wheat, rice and sugar will turn sharply higher as ships are forced to stay at sea, just as if there was a major hurricane striking the Gulf.

Let's hope this catastrophe ends better than expected and loss of marine life is minimal. Caution is needed by energy traders seeing this week's fall in energy futures as a shorting opportunity. Complacency ruled last week, but it is not likely to last in the months ahead.

Ethanol Blended Gas Major Headache for Boaters

As the boating season gets underway this year, I have noticed a significant amount of our fleet fuel customers bringing their watercraft to our Columbia, SC bulk plant to fill their boats and gas containers with our ethanol free conventional gas. Quizzing a few of the customers as to why they fueled at our facility instead of their local retail stations, the comment over and over was that they are fearful of the damage that can be done by ethanol decomposing gasoline.

Researching the blended ethanol gas affects on boats I am finding there is real truth to what customers are saying. The problem is not so much with 10% blended ethanol that is completely consumed until the tanks are empty within a week or two of purchase. The real problem comes into play with ethanol blended gas that sits in the tanks and hose lines for over three weeks or several months. The high humidity in summer months is easily absorbed by ethanol. The added water decomposes the gas causing octane levels to fall. This contaminated gas will then clog fuel filter and carburetors.

Prospective buyers of boats need to be wary of purchasing a boat that has been running on ethanol blended gas. Especially if the seller has been storing the boat for 90 days or longer with ethanol blended gas in the tanks.

Some boaters may live in areas where there is no conventional gas option. These boaters should be sure to refill their tanks every one to three weeks to minimize the affects of water absorption.

There is nothing worse than planning to have a fun day on the water only to have it destroyed by an engine that will not start. Having a good understanding of blended ethanol gas contamination to fuel supply will help to ensure time on the water is enjoyable.

Cheap Money, Easy Trading Profits

The Federal Open Market Committee left interest rates unchanged this week. No real surprise with the decision. What concerned investors was whether any indication would be given as to when rates might begin to rise. The Fed made clear that they have no intention of raising interest rates any time soon. This leaves the perfect trading environment intact for hedge funds and the big houses to continue borrowing money cheaply, investing in security of choice and earning steady trading profits.

The easy money policy of the Fed can be very frustrating to energy traders focusing solely on fundamentals. The fundamentals of over supplied inventories for crude, gas and distillates continue week after week, month after month, year after year. And yet those continually trying to short the market, with the exception of natural gas traders, have found themselves with negative P&L ratios.

In the long run, all commodities eventually return to obey the laws of supply and demand. However, in the process of returning to the real world, over supplied liquidity will always feed a bull market.

Eventually the Fed will quit feeding the bull by raising interest rates, but until then, buying on the dips, selling on the rips, will continue to turn cheap money into easy trading profits.

Energy Bulls Relying On the European Union Put

Trading energy options to many might appear to be a risky venture, especially in the volatile energy complex. To cash in, you not only need to guess correctly on the strike price, you also need to guess correctly on the time frame of when the strike will be hit. Therefore, even the most saviest of traders prefer to use options as insurance protection for their long or short futures contract positions. Fortunately for energy bulls, because of the European Union willingness to backstop Greecian economic turmoil, a political put is already in place protecting downside risk to long positions.

Similar to the famous Bernanke put for long equity postions in the United States, where traders can rest assured that the Federal Open Market Committee will adjust interest rates to buoy any sinking stock market, the European Union put is firmly in place as long as the EU decides to allow countries to remain in the EU despite not meeting debt to GDP ratio guidelines.

The weeks to come are sure to be filled with violent clashes between the Greek government and its unions. The euro likely to rise and fall just as violently, moving the energy complex up and down as well. Bulls will be waiting with ready cash on the violent dips lower and cashing out on the violent rips higher.

Fuel Costs and New Emmission Standards Mean Soon Coming Revival in Truck Purchasing

The recent recession forced most transportation companies to severely cut back spending on new trucks. This has been good news for truck parts outlets, horrible news for truck manufacturers. Now that the economy is improving, transportation companies will begin opening their check books for new trucks. This is indeed good news for truck manufacturers.

One manufacturer that is likely to benefit most is the maker of Peterbilt and Kenworth trucks, Paccar. Although only expected by most analysts to make $00.90 per share in earning this year, the company could easily double those earnings next year. In fact, the probability is favorable that Paccar will reach 2006 record high earnings of $4.00 in just a few years.

Why be so optimistic on the growth of Paccar's earnings? It is simply that demand for new trucks will likely double next year. Truck sales are at a twenty year low. The lack of new supply has increased the sticker price of used trucks, creating greater trade in value on older trucks that need replacing. Also, cargo weights have been steadily rising. An excellent indicator of an improving economy and greater demand for new trucks.

Replacing old trucks with new trucks they shall. With increasing diesel costs and ever stricter emissions regulations, transportation firms will have a much greater need for newer, fuel efficient and regulation approved vehicles. Paccar is ramping up now to meet the need. Smart transportation value stock investors will begin adding to portfolios now and enjoy the ride higher over the next few years.

Will Energy Traders Continue Outsmarting Most Economists?

Energy traders have led the way in having a better understanding of the world's economic recovery and positioning their trades accordingly. Crude has steadily risen to a 70% gain off last year's lows despite most economists, until recently, arguing for no or a very slow worldwide economic recovery. Will crude's up trending ways continue or is energy in the process of correcting an overly bullish market?

Energy bulls, much like equity bulls, have been much maligned by most economists over the past year. Energy bears taking their trading ideas from these economists, have handed over huge losses in the zero sum game of futures and options. Now that crude is staring down the $90 and potentially the $100 level, will the bulls keep charging?

In free markets all commodity pricing eventually obeys the law of supply and demand. Crude and its refined products have seemed to break away from this law the past 10 weeks with crude stocks rising continually with very little pull back in price. Gas and distillate stocks are at multi year highs and storage costs for crude are on the rise as over supply bids for storage. Crude future term spreads which appeared to be heading for backwardation, have recently widened keeping the contango market in place.

Also, affecting petroleum products supply will be more refineries in the United States and worldwide, soon to be coming online. Affecting crude supplies are better and more economical drilling techniques, spurred on by higher crude prices.

So where are crude prices headed? No one knows for sure. That is why most successful energy traders rely on technical analysis with a small dose of fundamental analysis thrown in. We are likely to see bulls make a run at $90 possibly $100, however the current overbought condition will make $90 the higher probability near term high. Bulls will be more than happy to collect their profits at these levels, and traders should be prepared for a slide back to $70 as contracts are exited by bulls ringing the cash register. Of course the bulls will be right back in the market stronger than ever at the $70 level, so when the market looks like it is about to crash, that is when the large houses will be putting even more cash to work.

High Liquidity Levels Continue to Drive the Energy Complex

When money is available at inexpensive cost levels, investors are willing to take on greater risk because they are able to leverage the lower cost structure for potentially higher returns. This has been clearly demonstrated over the past 12 months with the government's lower interest rate initiatives causing liquidity to flow into securities markets.

This flood of liquidity has helped stabilize an economy that was sinking in quicksand as early as last March 2009. Equity and energy markets have been a major benefactor of this tidal wave of cash allowing the S&P 500 to rise an astonishing 400 points and crude oil $50 in only one year.
When will the party end?

The bond market has always been the adult at the party keeping equity and energy from getting too wild. High liquidity eventually brings the fear of inflation. Bond buyers on the long end of the curve are beginning to demand higher interest rates to compensate an increased risk of inflation. The 10 year and 30 year bond yields are pushing upper range resistance levels, which if broken eventually raises borrowing cost for investors.

The ultimate result of higher interest rates are a slow down in economic development. This eventually leads to the equity and energy markets finding more sellers than buyers as investor's costs rise with the higher interest rates.

Energy traders will be monitoring closely the 10 year treasury yield which closed Friday at 3.86. This is just slightly below its one year resistance level of 4.01. Should resistance be broken on a weekly close, energy and equity traders will begin being hit with higher costs, resulting in less liquidity flowing to the markets. And once again the bond market is likely to efficiently tame the crude and equity party animals.

Gulf of Mexico No Longer Considered the "Dead Sea" of Oil Exploration

Royal Dutch Shell PLC announced Friday that they had made a significant oil discovery of approximately 100 million barrels, 25,000 feet below the sea bed, in 7,217 feet of water, on the eastern Gulf of Mexico. Six months ago BP PLC announced a "giant" discovery in the Gulf south of Louisiana containing approximately three billion barrels of oil. These discoveries are quite a turn around from years of exploration going back to the nineties of drillers coming up empty in this region and bode well for the success of future production in the Gulf of Mexico.

Until these recent finds, explorers were abandoning the Gulf of Mexico due to strings of unsuccessful drilling projects. Efforts were being focused in foreign waters with much higher operative expenses and much greater geopolitical risks. Oil exploration and production companies will now begin focusing again on the Gulf with a special emphasis on the largely unexplored eastern Gulf.

The recent successes are attributable to new deep sea drilling technologies that have given access to previously unpenetratable depths. Armed with these new techniques a record high 77 companies paid $949 million to the US Minerals Management Service last week for offshore leases.

Although several years will be needed to bring the new production to market, the exploration activity in the Gulf of Mexico is very good news for future US oil supplies.

US Economic Insight of Federal Express and the Federal Open Market Committee

Trading ranges on crude, unleaded gas, and heating oil futures have been narrowing for the past several weeks indicating traders are unwilling to bet heavily in either direction on the next move for the energy complex. Crude bulls made a valiant effort to take out January highs on Friday hitting an intraday high of 83.13, but were rejected by "da bears," confident that energy has had a nice six week run and needs a healthy pull back. Comments next week from the Federal Open Market Committee and the Federal Express conference call need to be listened to closely to understand where the US economy is likely headed.

When markets consolidate, as we have seen the past few weeks in both energy and equities, short and long traders begin getting nervous that either profits have run their course or losses will begin to mount. Putting on new trades or offsetting open trades are not wise until the congestion has cleared and market direction reasserts. Next Tuesday traders will likely receive market moving guidance from the Fed. Interest rates are unlikely to change. However, comments from the Fed Chairman will give better insight as to how well the US economy is improving.

Along with a slew of economic data to be released next week, Federal Express will be broadcasting their quarterly investor conference call. Not only is this company a bellwether for the US economy, the President, Frederick Smith, is a Yale graduate with a degree in economics. Listening to a Federal Express conference call gives valuable insight into the real state of the US economy.

The energy and equity markets feel top heavy, overbought and ready for a decline, but the FOMC and Federal Express may give the bulls the ammo they need to keep charging higher.

Jobs Bill Will Result in Loss of 23,000 Biodiesel Jobs

A jobs bill done properly will create incentives for private enterprise to expand their businesses and hire more employees. With the passage in the US Senate on February 24th of a revised jobs bill, approximately 23,000 biodiesel sector employees in 44 states will actually lose their jobs.

The biodiesel industry has been in a holding pattern since the end of 2009 awaiting the extension for the $1 per gallon tax credit for blenders of biodiesel. The recently passed jobs bill excluded the requested one year extension of the blenders credit. Plants that have been idle will soon be shutting down. Investment in extending biodiesel production infrastructure will soon be suspended unless a longer term tax credit bill eventually is introduced and passed.

Failure to extend the biodiesel blending tax credit has taken the industry by surprise. Since the credit has bipartisan support among law makers, passage of the extension appeared to be certain. However, because Congress dedicated their efforts to moving forward the health care reform bill, they decided not focus attention on the tax extenders package.

Unfortunately thousands of biodiesel employees now will be facing severe cut backs in hours and ultimately permanent layoff looms. It seems rather ironic that a government administration that is trying hard to convince the public that they are pro jobs and pro environment, neglected to include a tax credit extension that would have furthered both causes.

Playing the Right Tunes With Bollinger Bands

Crude bulls are having a remarkable run this month despite a seemingly endless stream of poor US economic data, credit tightening in China and increasing European sovereign debt concerns. The near month crude futures contract is up almost 10 %. What are the bulls looking at that the bears do not see?

Using the word bull or bear with large energy futures traders is a bit of a misnomer as hedge funds and some ETFs regularly shift from bulls to bears and bears to bulls generally on monthly or bi-monthly time frames. The reason for this is their favorite technical indicator, Bollinger Bands. Bollinger bands graphically indicate standard deviation from the price mean. Computer trading programs are written to take advantage of crude's propensity to stay within 2% deviation of the mean.

Large traders jumped all over crude April 2010 futures at February's low of $69 when small sized traders were still selling hoping crude would keep sinking. What gave the hedge funds confidence to buy? The $69 figure happened to be the low end of the weekly Bollinger Band chart. Of course they could have been wrong and some unforeseen event could have triggered more selling. However trading is all about probabilities. The rareness of an outlying event occurring was more than offset by the high probability of crude prices returning back to its mean.

Crude April futures are now sitting just under $80. The weekly upper Bollinger Band limit is $84.7. It will be interesting to watch the bears trying to defend their short positions at the $80-$81 levels. They will need a lot of help from a much stronger US $, evidence of much weaker crude demand and a widening of outer month crude futures spreads. Without these events occurring the hedge funds will once again be able to congratulate themselves on ignoring the fundamentals and relying on their trading programs.

Are Sovereign Funds Now Regretting Diversifying Away From the US Dollar?

The US Federal Reserve handed energy investors a surprise increase of the discount rate from .5% to .75% late Thursday afternoon. Trader's immediate reaction was to do what they are trained to do when a surprise action by the Fed occurs and that is to close out positions and try to digest the meaning of the move at a later time. Well, it did not take long for traders to discern what to do next. Upon open of the NYMEX pit session traders were immediately hitting the bids pushing gas, distillate and crude futures into positive territory after the first hour of trading. The big question is; will the buying continue in next week's trading sessions?

The key to watch for next week is will sovereign funds, who have been selling the US dollar for the past year and diversifying into euros, gold and who knows what else, begin panicking that the US dollar is going to continue moving higher and convert back the US dollars pushing the US dollar even higher.

China could be the leader in this conversion back to US dollars as they have been buying less US treasuries in favor of commodities and other currencies. If China begins panic buying, other sovereigns will follow. The likely event is the buying will push the Euro versus US Dollar spot price down to $1.30 within a few weeks and eventually to $1.20.

As the US dollar buying continues, commodities will likely sell off. Energy traders will do well to look for shorting opportunities this week as crude pops its head above the $80 level.

Economists Olivia Newton John and John Travolta Were Correct: "Grease (Greece) Is the Word"

Investing in commodities should always be a relatively stress free exercise. All one really needs to know is the past, current and predictable future value ratios of supply versus demand. Private and government supplied data makes knowing the past and current variables rather easy. The future value variable is the tricky part and is what makes markets. Throw in some outside governmental and currency risk and our stress free trading environment receives unwanted tension. Energy investors are scrambling to evaluate the future impact the governmental risk of Greece combined with a tumbling euro will have on future demand of crude and refined products.

The European Central Bank (ECB) has temporarily succeeded in calming fears of potential collapse of the European Union by stating Euro member countries will support Greece's government. The problem for the ECB will intensify when Portugal, Ireland, Spain and Italy raise their hands saying we need a bailout too. The amount of borrowing needed to sustain these countries will prevent the ECB from fighting inflation by having to hold down interest rates. The consequence will be a weaker euro.

There is no lack of currency traders currently positioned short on the euro. The oversold scenario could give the euro a bounce higher on any solid financial plan coming from the ECB. However, as crude is priced in US dollars, it will eventually need to adjust its price lower to accommodate a continuing strong US dollar. Future demand for energy will most likely need to be adjusted downward to accommodate the weakening European gross domestic product.

Energy investors will be able sleep better at night by positioning portfolios weighted on the short side on price increases to resistance levels.

Have Leading Indicators Quit Leading?

Since energy traders lack the crucial investment advantages of omniscience and foreknowledge, reliance is heavy on leading indicators to discern directional tendencies of energy futures. Lagging indicators, such as employment data, in times past were largely ignored as not providing valuable data as to future market price trends. It seems, "the times they are a changin".

One of the most closely watched leading indicators, The Institute of Supply Management's Manufaturing Report on Business, gives traders a clear understanding of the actual health of the economy. When January's report was released on Tuesday of this week showing six consecutive months of manufacturing growth and the overall economy growing for a ninth consecutive month, energy futures surged higher. Then on Thursday, weekly employment data showed a slight decline in employment, raising fears that Friday's all important monthly jobs report would post worse than expected. Crude and the products quickly sold off. When the actual report was released on Friday crude fell all the way to its major support level of 69.54. The stock market also fell hard on the release of this lagging indicator.

Granted, much of the reason for the sell off was technically driven, with the catalyst of a falling euro. However, the fundamental recovery depicted by the key leading indicators ISM, GDP, and Leading Economic Index, all clearly reveal the future is brighter. Traders need to be careful on placing too much emphasis on weaker than expected employment lagging indicator data.

A few other leading indicators that successful energy traders monitor are pointing to solid economic recovery. The American Trucking Association's Truck Tonnage Index has been on a steady increase and is now at the highs of April 2008. The Baltic Dry Index also has risen from the depths of 645 in April 2008 to its current level of 2,685.

The leading indicators are showing we are in a jobless recovery. Fortunately for traders profitable trades abound whether the market is trending higher or lower. Reading the tea leaves of the leading indicators, contract size should be raised on long positions as the higher probability set up.
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Haiti's Financial Relief Is Just Offshore

Haitians have been suffering long before the devastating January 12th earthquake. Foreign capital investments have been extremely limited due to years of corrupt governments and lack of investment banking infrastructure. New offshore shallow water oil discoveries may have the potential to drastically change Haiti's financial future.

As Haiti was experiencing the worst natural disaster in its history, French scientist Dr. Daniel Mathurin was releasing his latest hydrocarbon exploration research on the Greater Antilles.
Dr. Mathurin writes, "The Central Plateau, including the region of Thomond, the plain of the cul de sac, and the bay of Port Au Prince are filled with oil. Haiti's oil reserves are larger than Venezuela's. An olympic pool compared to a glass of water that is the comparison to show the importance of Haitian oil compared to oil in Venezuela."

Further evidence that Haiti has potential to be a major oil producer is given in a recent US Geological survey revealing the Greater Antilles as having discovered at least 142 million barrels of oil and 159 billion cubic feet of gas. Undiscovered oil may be as high as 942 million barrels and 1.2 trillion cubic feet of gas.

Energy exploration and production firms will now be reviewing these recent findings to analyze how they may begin to capitalize on Haiti's hydrocarbon bonanza. Revenue derived from the Haitian government leasing offshore oil and gas development will greatly help the longer term recovery. For a country that is in desperate need, these discoveries are great news, and gives their fragile future greater hope.

Managing Governmental Policy Uncertainty Risk

Of all the risks that energy traders manage, there is none more difficult than governmental policy risk, when a change in well established policies may be on the horizon. This past week traders were forced to deal this risk and will likely continue having to manage governmental policy uncertainty for the next several weeks.

The direction of US financial regulatory policy may change dramatically with new proposals voiced by President Obama on Thursday. Appearing with Paul Volcker, instead of current Secretary of the Treasury, Tim Geithner, President Obama announced he will seek restrictions on proprietary trading and impose a levy on bank wholesale funding. In and of itself the market would be able to adjust to these policy changes. The greater and more difficult risk adjustment comes into play with the man standing next to President Obama as he gave his speech.

Lots of questions arise from last Thursday's speech. Where was Tim Geithner as President Obama was speaking? Where was Ben Bernanke? Why was 82 year old Paul Volcker called out of retirement bliss to construct the new regulatory policies? Why are some Democrats now changing their votes against the renomination of Ben Bernanke? Not knowing the answers to these question, traders do what they are trained to do when sudden uncertainty arises; get ahead of the crowd and exit your long positions immediately.

If greater clarity is given that Ben Bernanke will be reappointed, the markets will likely stabilize quickly. Should more Democrats try to separate themselves from President Obama by voting no to his reconfirmation, we are likely to see equities and commodities continue to slide as traders adjust to a potential strong dollar policy with Paul Volcker receiving greater prominence in the Obama administration.

The most conservative risk management tool in this type of political uncertainty is to stay flat on your trading until clarity appears. Energy traders wanting to gain an advantage before clarity is apparent should monitor the DailyFX Carry Trade Index. The index has reversed from 2009 channel highs and now sits poised to break channel support. Should this event occur, it is a clear sign traders are making a trend shift away from the year old arbitrage; sell the US dollar buy commodities. Exiting these positions requires they buy back the US dollar, which will increase downward momentum on the DailyFX Carry Trade Index. This will create more fear in the market and pressure the energy complex lower.

CFTC Energy Position Limits Proposition for the Bigs

The Commodity Futures Trading Commission has proposed new position limit rules for the large trading houses. The new rules will only affect the ten largest position holders. Will these rules make a difference for energy traders? In a nutshell, the rules are likely to not even affect the bigs.

The key points of the new rules are as follows:
1. Position imposed limits on oil, natural gas, heating oil, RBOB gas traded on NYMEX and ICE
2. For all trading months combined limits at 10% on first 25,000 contracts open interest,2.5% next 25,000 lots
3. Single month position limits proposed at 2/3 of the all trading months combined position limits
4. Spot month position limit for contracts physically settled at 25% of estimated deliverable supply

Trading houses knew these rules were coming when Gary Gensler took office in May. The CFTC has been under pressure to strengthen limits due to populace thinking that large speculators were the cause of crude's run up to $147. Since bona fide commodity inventory hedging is exempt from the new rules, most of the bigs have enlarged their physical product trading desks.

The trading limits proposed are very generous. At current trading levels the new rules will have virtually no impact on market liquidity. Had the CFTC wanted to make an impact on speculation the focus should have been on margin requirements. The downside would be higher costs to producers and refiners which would inevitably be passed along to end users, ultimately raising the price of refined products.

It was interesting to see the energy complex remain virtually unchanged Thursday when the rules were released. The market then pulled back on Friday with the exception of nat gas rising .10. The pull back was more related to a strengthening US dollar vs the euro rather than large traders exiting long positions in fear of the new rules. For now, do not expect the trading limits to have any affect. This may frustrate law makers who may seek stronger action should the energy complex break through to new highs in ninety days when the proposition is scheduled to go into effect.

Predictable Arbitrage Hedging Opportunities

Generating additional profit margin for wholesale energy sellers generally requires a willingness to take on added speculative risk. Understanding systematic basis movement tendencies enables sellers to increase margins without greatly increasing risk. This is the essence of arbitrage hedging.

The tendency of basis to narrow over time at a predictable rate in a contango market, is a low risk profit opportunity. In a full carrying charge market, basis will narrow over time at a rate approximately equal to storage costs per unit of time. To profit from this narrowing basis movement simply buy the less expensive cash commodity product and sell the corresponding futures contract. As the basis continues to narrow the loss on the cash position will be offset by the greater gain on the futures contract.

The key to making arbitrage hedging a consistent winner is understanding the type of market the particular energy commodity you are selling is currently trading. Should the outlying futures contracts be trading below current spot prices, the above strategy would result in a loss. In this scenario of a backwardated market, basis movements are not systematically predictable.

There are very few low risk opportunities for energy wholesalers to add profit to each gallon sold. Taking advantage of systematically predictable basis movements through arbitrage hedging, is one strategy that every seller with storage capacity should be aggressively implementing.

Innovative Nat Gas Drilling Technologies Creating Reliable Long Term North American Supplies

In the past few years, natural gas drilling production technology innovation has seen a dramatic increase in efficiencies. Combine these new drilling techniques with the development of unconventional shale gas resources and the stage is set for dramatic production increases and reliable long term supplies throughout North America.

One of the major reasons nat gas is not currently used on a greater scale by transportation and industrial end users is that in the past nat gas supply stocks were not available in reliable quantities to enable the use of long term forward contracts throughout North America. And even in certain areas where supplies were adequate, price volatility made gas a difficult risk proposition.

We are entering a new world now of abundant gas supplies. Encana's, Dave Thorn, states, "The economical recovery of shale gas has been a game changer. Reserve life estimates have increased dramatically, and North American gas supplies could rise by 25 bcf per day."

These estimates are being driven by rig efficiencies. Not too long ago, supply estimates were largely based on the number of drilling rigs in production. However, unconventional gas wells are driving production increases even though active rig counts have fallen 50%.

Not too long ago shrinking nat gas supply stocks created worries that North American gas supplies were in a permanent decline. Liquid Natural Gas was seen as a possible, yet expensive solution to this decline. Those worries are quickly disappearing. The one caveat to the future of natural gas is proposed environmental regulation. These concerns are likely to be overcome by recent environmental research showing the new shale drilling technologies are not harming local water supplies. This research along with the economic and environmental benefits of switching to gas as a bridge fuel will make the future very bright for natty gas.