Freezer Frame.

Has the coldest winter in a decade, as some experts predict, just begun? Can record cold really overcome record supply if refineries cut back production? Well it seemed a bit more plausible as winter worries helped an oil flurry on a light volume trading session.

The cold weather fed into fears that refinery cut backs could cut into a massive oversupply situation when every trader turned on the heat. Throw in a weaker dollar and you have the perfect recipe for a holiday trade oil rally. Barbara Powell at Bloomberg fed into traders concerns when she reported that, "Oil refiners from Valero Energy Corp. to Sunoco Inc. are cutting the most capacity since the early 1980.” The reason she says is that they fear that even, “the coldest U.S. winter in a decade won’t be enough to soak up a glut of fuel.” Powell said, "returns from processing crude into heating oil for delivery in February are the lowest in six years”. “The recession cut demand by the greatest amount since Jimmy Carter was president.” (Input Jimmy Carter sweater joke here) Powell warns, "the margins for making heating oil and diesel may decline 33 percent by January because of the increasing supply” quoting data from Energy Security Analysis Inc. Would traders have even cared about that if it was not cold outside? Probably not! What is more Powell points out that forecasters like Matt Rogers at Commodity Weather Group is saying that an El Nino system in the Pacific Ocean may push down temperatures in the Northeast U.S. during the first quarter of 2010.

This week the National Weather Service will issue its weather forecast that may take the heat off its frost bitten revenge. Refiners are hoping for a cold one, or at least better margins, or some might not be in business in the spring. Powell reminds us that there was enough heating oil and diesel in the U.S. as of Oct. 2 to last 50.5 days, according to the Energy Department, the most since at least March 1991. Stocks have risen by 33.9 million barrels, or 25 percent this year. The increase in distillate stocks to 171.8 million barrels, the highest since January 1983, has been encouraged by the so called contango in the heating oil market, where contracts for later delivery are more expensive than near-term supply.

Light volume and a weak dollar are overshadowing the glut of supplies. There are more stories overnight that are adding to those concerns. The Wall Street Journal is reporting that China and Russia are working on ways to eventually settle their trade with the Chinese yuan and Russian ruble. The Journal says that China Vice Premier Zhang Dejiang said both sides should expand local currency settlement in their border areas, and that China and Russia plan to set up a bilateral currency deal. As part of such moves, banks in China will be encouraged to set up outlets in Russia, and Russian banks will be encouraged to do the same in China, Zhang said. At the same time, Russian Deputy Prime Minister Aleksandr Zhukov said Russia and China are working on using their own currencies to settle trade instead of using the dollar and euro, but that such a move would take a long time. “This comes as the now chummy Russian and Chinese sign a big gas deal. Reuter’s news reports that “Russia and China bolstered their close but increasingly imbalanced relationship on Tuesday when Russian Prime Minister Vladimir Putin ushered through deals worth $3.5 billion and looked to sign a tentative gas supply agreement.” Is Europe getting nervous yet?

OPEC raised its oil demand forecast by 200,000 barrels per day. OPEC puts oil demand at 84.2 million barrels a day. That is down 1.4 million barrels from a year ago. Another bit of news to give the bulls a boost. Oil looks like it wants to test the upper end of the trading range! Be careful!

Always get the latest on never boring Fox Business Network where you can see me every day! And if you want to trade anything from stocks to futures or foreign exchange you need to open your account with PFGBest! Not only gas but metals, gold coins, bars, but Foreign Exchanges as well and even stocks. If your broker is not doing enough for you call me at 800-935-6487 or email me at pflynn@pfgbest.com.

Stopped on short November crude from apprx 7270 at apprx 7390.

Sell November RBOB at 18620 - stop 18770.

Sell November Natural gas at 510 - stop 515.

Phil Flynn

Senior Market Analyst

800-935-6487

312-563-8344

pflynn@pfgbest.com