Yesterday the petroleum markets were all about trying to digest the weekly inventory reports. Refineries are running at the lowest level since the 1980’s if you exclude time when refineries were shut down for hurricanes and this shows that demand is lousy. Yet at the same time there are fears that we are finally getting down to a point where refiners have cut back enough to meet slowing demand. Despite this fascinating study of supply versus demand, we will get more into what really made the market pop and drop and that was a story from the AP that was released again by the AFP on the Dow Jones commodity wire.

A breaking oil market seemed to rally quickly after a headline crossed that said, “WHITE HOUSE: Reported rocket launch by Iran would be a provocative act.” Oh my gosh! Rocket launch! What was that, Get Me Out! Well that seemed to be the reaction or a higher buy got triggered but the story had come out earlier. The report did say that the White House reported a rocket launch by Iran would Be a "provocative act.", but the White House was still checking out reports of the launch. The Kavoshgar 3 (Explorer) rocket was launched Wednesday, Iranian state-owned Al-Alam television reported.

Apparently Iran State run TV reported they fired a rocket into space carrying live animals like a rat,a turtle and some worms. They say it has nothing to do with wanting a nuclear weapon but only a scientific study. Critics say they can't think of any scientific study of merit that would include sending worms up in space. Well the truth is there could very well be a good reason to send a worm into space. Maybe they were testing it to see if it could survive being dropped into a bottle of tequila while in space.

After the report of the rocket launch the market really seemed to focus on what was a bearish inventory report from the Energy Information Agency. Like I said, what seemed to be the most important part of this report was the weak refining activity. The EIA reported that U.S. crude oil refinery inputs averaged just 13.5 million barrels per day during the week ending January 29, 163 thousand barrels per day below the previous week's average. Refineries operated at 77.7 percent of their operable capacity last while gasoline production decreased and averaged only 8.6 million barrels per day. Distillate fuel production decreased last week, averaging 3.5 million. David Bird at Dow Jones points out that the four-week runs were the lowest since Oct 10, 2008, when Gulf Coast refineries were hobbled by hurricanes. Excluding Hurricane-impacted operations in 2008 and 2005, the four-week level of crude runs was the lowest since March 14, 1997.

Those low runs helped crude supply rise and products fall. The EIA says that US commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.3 million barrels from the previous week. At 329.0 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories decreased  by 1.3 million barrels last week, and are above the upper limit of the average range. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories  decreased by 1.0 million barrels, and are above the upper boundary of the average range for this time of year. Propane/propylene inventories decreased by 2.9 million barrels last week and are below the lower limit of the average range. Total commercial petroleum inventories increased by 0.7 million barrels last week, and are above the upper limit of the average range for this time of year.

The EIA says that demand as expressed by total products supplied over the last four-week period has averaged 18.8 million barrels per day, down by 2.0 percent compared to the similar period  last year. Over the last four weeks, motor gasoline demand has averaged 8.6 million barrels per day, down by 0.5 percent from the same period last year.  Distillate fuel demand has averaged 3.7 million barrels per day over the last four weeks, down by 9.1 percent from the same period last year. Jet fuel demand is 0.2 percent higher over the last four weeks compared to the same four-week period last year.

Bottom line: will refinery run cuts fall below the lackluster demand numbers? If that happens than can poor demand all of a sudden becomes bullish? George Orwell at DTN said that the entire energy complex recovered quickly as traders turned to buying gasoline crack spreads in anticipation of tight supply in the future as refiners continue to idle or shut plants due to low margins.

If demand is so bad why are manufacturing numbers so good? Are the factories running on some new kind of fuel? Worm power perhaps?  Bottom line we think bearish will still end up being bearish. We think these weak demand numbers ultimately will be the bulls undoing. Long term traders keep your shorts in place. Call me for bearish option strategies and day trade numbers at 800-935-6487 or email me at pflynn@pfgbest.com to open your account. See me every day on the Fox Business Network.