The bubble has popped; or at the very least it has sprung a pretty large leak. How large of a leak! Well maybe a gash about the size that sank the Titanic. Aye Captain, better call for the lifeboats as we are going down.
Oil prices had the biggest one day drop since the bombs were first dropped on Baghdad during the 1991 Persian Gulf War ignoring what some say, based on market expectations, was a so called “bullish” weekly inventory report. Oil that has far exceeded normal rates of price increases has been driven higher by the commodity mania that has gripped the world financial markets. It wasn’t about supply or demand – it was about buying something that was moving and being bought as a hedge against a falling dollar. This buying created a bubble that is normal in every type of market.

The Fed created the bubble and helped pop it by acknowledging that by gosh by golly, inflation really does exist. But more importantly the market is selling commodities because they finally feel the Fed is starting to get it right – that the Fed is no longer behind the curve, and can start to heal the credit crisis that ails us.
Does this somehow change the long-term bullish case for commodities? Absolutely not! But there are times that even in the strongest, most solid of markets, bubbles can get created and bubbles then go snap, crackle, and pop. Ok, maybe that's Rice Krispies but you get my point.

How do you know it’s a bubble? Well it starts in your nose and then goes to your toes and then baby, you know. Well you sometimes don’t know until it pops. Earlier this year I called the price of oil a bubble but I was too early too call for the pop. I correctly predicted demand would slow and supplies would rise but that of course didn’t matter as money was desperately seeking a safe haven from financial fallout. I realized my error and joined the bubble expansion yet now it’s clear that this bubble has lost its fizz.

Now many are not happy that I am calling this a bubble even now and they're unhappy that this week’s market action is proving me right. For those that are not pleased I will remind them that I have been a long-term commodity bull not just a long-term bull on oil. No, not just bullish in the last few year but a prominent bull since oil was in the twenties.

Early on I realized and wrote about the coming bull commodity cycle when many were still focused on the Dot.com bubble. Many eschewed the commodities markets for markets they found much sexier. Commodities were the old economy and tech was the new. Most money managers in their kakis and opened collared casual shirts would never dream of getting their hands dirty trading something as unappealing as commodities. They thought commodities were for farmers and gamblers and had little place in a thinking man's Dot.com world. Now of course money managers and traders across the globe act as if they discovered commodities and are shocked that they could ever go down. Well I guess they are not shocked anymore.

Obviously the fundamentals are much more solid for commodities than they were for the majority of dot.com stocks but that does not mean that prices can’t get bubblicious. Prices have soared far beyond what would be considered normal in a slowing US economy and yes, I am going to say it, world economy. (ECB manufacturing data anyone?)

Just take a look at yesterday’s big picture on oil inventories. We are seeing clear signs of price inspired demand destruction. Nowhere is that more apparent than what we are seeing in gasoline demand. Gasoline demand is falling and falling hard. The four-week average gasoline demand figure went negative on a year over year basis. Gasoline supplies did fall but that was because a refiner cut back on production because hardly anyone is buying it. Refining margins for gas are awful and the market is paying a premium for the production of diesel. Why make gas when supplies are soaring? Gas supplies are soaring/rising to 11.1% over year ago levels. This is close to a 15 year high for supply.

Crude oil supplies rose less than expected and trail year ago levels by 3.7%. But is that enough of a deficit to add a $30.00 premium to the price of a barrel of oil?

Where we are seeing a deficit and some bullishness in distillate that is 6.7% below a year ago in part due to the cold winter globally and new tougher regulation when it comes to lowering sulfur. Yet does not translate into $10 dollar oil.

Refinery runs fell hard as 83.8% of their operable capacity is falling and demand is taking its toll. Gas production fell to 8.7 million barrels and distillates fell to 3.8 million barrels. Crude oil imports averaged 9.5 million barrels down nearly 1.1 million barrels from the previous week. Once again that could be fog related.
Happy Easter! Make sure when you’re filling up the Easter Baskets and wearing your bonnet when you call for your username and password to Alaronenergies! If you don’t have it call me to open your account and get that password at 800-935-6487 or email me at pflynn@alaron.com. Check me out the Fox Business Network!

Sell May crude at 10500 - stop 10700.
Sell May RBOB at 26700 - stop 27000.
Stopped on long April heating oil from apprx 29900 at apprx 30400. Sell May heating oil at 28700 - stop 30000.
Buy April natural gas at 890 - stop 880.
Have a GREAT day and a Happy Easter!