Trade of the Year
Research for Online Investors

by John Dalt

12/31/09

We have called crude oil the ‘trade of the year’ in 2009  With crude oil up 72%, it was a pretty good call.  What will our ‘trade of the year’ be in 2010?  We are narrowing the list and will reveal our trade of the year for 2010 sometime in the month of January.  Let’s look at crude oil on this, the last day of the year.

Crude oil inventories were down last week 1.5 million barrels.  Gasoline stocks were down 300 thousand barrels, and distillates inventory fell two million barrels from the previous week.

These numbers are important because as inventories decline the price must go up.  Supply and demand will dictate higher prices chasing a valuable commodity.  Following are the two charts we have used to visualize U.S. inventory.

This chart shows the current inventory (line) compared to the average range. Last summer we predicted the line of current inventory would meet the top of the average range in November. It took 45 days longer than we thought, but here we are. The farther the current inventory line goes into the average range the higher the price will go. If it reaches the bottom of the range, crude oil traders will be popping champagne corks. Our SwingTrader subscribers may have a sip!  We already have paid for the crystal, now to buy the Dom Perignon.

This chart shows the days of supply. This chart tells us how long the U.S. economy can continue with supply in storage. When Katrina hit the Gulf of Mexico, imports were interrupted, refineries were damaged, and pipeline operations were hampered. As this chart moves closer to 20 days supply, pressure builds on refineries to secure crude oil. No different than housewives going to the grocery store when a blizzard is predicted. You cannot eat what you don’t have. Again, prices go higher.

I saw some interesting statistics this morning that may help us understand the world demand for crude oil.  China’s crude demand increased 18.7% in NOVEMBER YEAR-OVER-YEAR.  This was the third month China posted double digit growth in demand.  China is the world’s second largest oil consumer, after the U.S.  Platts Research estimated China’s daily consumption at 8.22 million barrels in November.  Increased consumption in China is indicative of what is happening to demand across Asia and other developing countries.

The charts shown above would predict higher oil prices in 2010; perhaps record setting high oil prices.  Let us consider growth in demand from the world’s number two consumer.  Is there any doubt that crude oil will cost more one year from today?

Here is another chart we may want to start watching.  Natural gas storage.  Current storage is above last years, but there are quite a few reasons to like this chart.  It kind of reminds me of a ski jump...for prices!

It is scary when Dennis Kucinich (D-Ohio) might agree with your editor.  The congress is calling for investigations into Treasury lifting the limit on the government backstop for Fannie and Freddie.  I have picked up more information, and am updating and improving the article that appeared yesterday.  It is available under the MarketToday archive if you would like to read it with more detail than yesterday’s version.

To the Mailbag:
“I received this email, what do you think? The U.S. House & Senate have voted themselves $4,700 and $5,300 raises.  They voted to not give you a S.S. Cost of living raise in 2010 and 2011.  Your Medicaid premiums will go up $285.60 for the 2-years and you will not get the 3% COLA.  We need to kick the bums out.”---paid up subscriber R.A.

The actual truth is somewhat obscured by the practices in Washington. There will not be cost-of-living adjustments to S.S. because they are based on the inflation rate reflected in the Consumer Price Index. There will be a pay increase to all federal employees, and the congress has rigged it so they don't have to vote on increases for themselves by piggybacking on federal employee pay. I assume the Medicaid increase cost is in the new health care bill that cleared the Senate, but do not know. I had not heard anything about an increase in Medicaid premiums.

I received the same email you have referenced this morning.  But, think about this.  Think about Social Security and Medicaid as "entitlements."  I know we pay into them, but don't kid yourself; they are just taxes with an unfunded promise.  By getting angry over cuts in these programs, we end up supporting the government getting larger and more wasteful.  I cannot be upset over any small cut in programs, so cannot tie it to "unfairness" because "they got theirs but I didn't get mine."  I know this is counter to our self-interest, if we narrowly define our self-interest as the amount of money we can get from the government.  This is exactly what the progressives want us to do.  Just like the 49% of Americans that do not pay taxes and vote depending on how much a candidate promises them.

And with that, HAPPY NEW YEAR

John Dalt

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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