When you step back and put it all together, it's nice timing. It's a New Year's reminder of the geo-political factors that are driving the market higher.
It appears increasingly likely that we will need colder-than-normal temperatures in order for heating oil and gas oil to perform this winter and lead crude up,
I think the markets will begin pricing in the downstream investments during 2007.
The reason we worry about political risk is that it has a chance to become a real fundamental factor, like it happened in Nigeria, where you lost some real supply. The spare capacity issue for refining and crude production still underlies everything because demand is still healthy.
We're trading on the weather. It's cold in New York, so the price is going up.
With each passing week of warm weather, the upside diminishes, the downside increases, and the chances of an oil market correction before the springtime also increase.
But markets are not really surprised. UK oil production has been declining for several years.
There is a lot of refinery capacity around Houston. If (Hurricane Rita) goes further south then it could hit refineries around Corpus Christi.
We had such a big run-up in the last couple of weeks that the market is going to want to consolidate and pause to figure out what happens next.
The speculative money is as much of a key driver for oil prices as Iran and Nigeria. There has been a massive influx of new money into commodities in general since the start of the year.
Declines will continue. There is only one new field of any size - the Buzzard field - set to come online. Otherwise it's just bits and pieces.
Another surge of new money is coming into the commodity markets.
As far as making a big bet on the weather, even if you're bearish it's still too early to go short in a big way.
The bottom line is US demand seems to be recovering, but the market still needs to be convinced of that.
There's a lot of investment money searching for a home. Investors are buying the argument that it's an emerging asset class and we've been seeing that with a vengeance in January.
It's U.S. gasoline, its Nigeria, it's the financial flows and Iran is there in the background. Do I think we're going to hit $70 at some point? Easily.
Strong demand is now priced in. Barring a sustained cold snap, I can't see any fundamental reason for much more of an up-move.
It's just a bit of profit taking after the weekend.
This is just drifting around. But the Nigeria situation, as the weeks wear on, is providing a firmer floor for the market.
In the near term, the markets will continue to strengthen and weaken with the weather, and crude and product prices will be range-bound.
The market doesn't need more sour crude now, it needs more oil products. For anyone who has been paying close attention to oil markets in recent months, the whole thing is a big shrug of the shoulders.
The difference from the last couple of years is that supply fears are driving the market.
The markets have been reacting to news on Iran, but the physical oil markets have been fairly relaxed so I'm not surprised to have seen them fall.
The market has three drivers right now: distillate stocks (including heating oil), demand growth and the weather, ... Stocks are moderately bearish, demand is neutral and the calendar itself is moderately bullish, assuming a normal winter.
The market has consolidated for the last day and a half. If the gasoline draws are larger than expected, we'll be off to the races again.
