In This Issue

Trading Systems and Auto execution

Energy Special Report

Reports and Expiration Notices

October 12th, 2005 — Issue #296

Trading Systems and Auto execution

Trading systems has gained strong popularity and interest from the investing public. Not all systems are created equal or reported equal. To assist our clients and future clients, we have researched more than a few systems and compiled some informative data for your review.

You can view our trading systems page and receive additional information at: http://www.cannontrading.com/services/managed.php

Energy Special Report

by James Steel, Marshall Steeves

One of the more closely watched reports in the petroleum industry is the International Energy Agency's monthly report. The IEA is a Paris based petroleum analysis group set up by the OECD after the 1973-74 energy crisis to monitor and report on the world petroleum markets and report supply/demand balances including inventories. Below is a synopsis of the latest report, with some comments and observations of our own.

• After historic price rises, crude and refined products came under pressure in the wake of hurricanes Katrina and Rita. Crude fell back below 62 a barrel. Record US imports undermined gasoline as did the maximization of yields at existing domestic US refineries. Heating oil moved above gasoline supported by natural gas in early October.
• Petroleum demand was distorted by logistical disruptions related to the hurricanes. Demand was significantly lower in the US than would otherwise have been the case. This will be less the case this month. However high prices have reduced demand, and the IEA pared 2005 demand growth 90,000 bpd to 1.26 mbd. For 2006, demand is reduced slightly but it should be higher than 2005 at 1.75 mbd.
• World oil supply fell 845,000 bpd in September to 83.8 mbd. The decline is the result of the hut-ins and damage done primarily to US Gulf Coast production. 1.2 mbd was shut in leading to a downward reconfiguration of non-OPEC supply of 300-400,000 bpd for 2005 and 2006. Non-OPEC growth is now calculated at 170,000 bpf for 2005 and 1.3 mbd for 2006, with NGL growth of 400,000 bpd in each year.
• OPEC crude supply rose 100,000 bpd in September to average 29.8 bpd—with increases from Iraq and Kuwait. Cartel spare capacity remains well below 2 mbd. Although the cartel offered this extra supply to the market, there have in actuality been few takers--it is mostly heavy sour crude. OPEC is straining to increase capacity, which should rise 500,000 bpd by end year and in early 2006.
• Forward demand cover is unchanged at 54 days globally—2 days above last year. Builds in distillates have offset reported draws in gasoline stocks by the IEA. OECD total industry stocks fell 3.5 mbd in August however.
• Refining margins in the key Atlantic basin went sky-high on surging product prices. High hydro-skimming margins in September should encourage the use of spore crude distillation capacity. The potential output loss in refining of 163 mb for the year may be partially reduced by a decline in demand in the Gulf region in the US.

The System is Proving Flexible

Prices appear to be settling back to pre-hurricane levels. However the industry still faces steep challenges. The IEA foresee a loss of 140 mb of crude and NGL to year-end and as well as losses of 163 mb of refined product. This has been offset by 1) lower demand and 2) increased imports. However, the Agency stresses these numbers are subject to change given the rate at which the Gulf infrastructure recovers. Refinery shut-ins have a rough parity to crude oil production shut-ins. Similarly refined product output losses have been offset by reduced demand, stock draws and imports. The decline in product demand in September was particularly steep at 2.3%.

Demand declines are not merely the function of price. In September logistical constraints and policy changes also played a role in restraining demand. But these factors will play less of a role going forward. Distribution will improve and depleted stockpiles will have to be replenished. Also there may be a more pronounced substitution from natural gas to oil—considering the massive price discounts of fuel oil and the parity of heating oil to Henry Hub.

Given all its problems the energy supply system has proved remarkably flexible globally but especially in the US. Theoretically there is sufficient spare capacity in global crude distillation capacity to counteract the projected refined product loss for the rest of the year. Assuming the following:

• No further unplanned refinery outages
• The bulk of maintenance can be postponed
• Hydro-skimming margins remain positive
• Refinery throughputs can be maintained at these very high levels across many different countries simultaneously (this has never been attempted before)

This is asking a lot of the industry, but it may be able to deliver. Hydro-skinning levels will more than likely remain attractive. Margins are very high, and there is every reason every refinery in the world will want to maximize runs. Inventories globally but especially in the US are high. The releases from the IEA member countries and US SPR will provide liquidity when needed. Commercial stocks may even be mobilized if holders feel confident about the future. Commercial holders may assess the slowdown in demand and a more positive supply side going forward and feel more comfortable with lower stock levels. If demand is not up sharply in the fourth quarter commercials may run inventories down.

2005 has been a bad year for supply—but the situation will likely improve. 2005 non-OPEC supply growth will only be 170,000 bpd—a six year low. Production will rebound to 1.3 mbd in 2006 however as the US recovers and other sources of production come on-stream—encouraged by high prices. OPEC will also be increasing capacity with some being the highly sought light sweet crudes. This may make the market more stable going forward. But in order for everything to go smoothly from here on a number of pieces to the petroleum puzzle have to fall into place. These conditions may prove tough to meet. But at least as the smoke clears we have a better picture of the state of production, refining and transportation facilities—and when they will return to market.

It goes without saying all forecasts are full of uncertainties. The main driver in forecasting petroleum demand is economic growth. However there are others such as Chinese restrictions on transport fuels and power, which are leading refineries to limit output.

Copyright by REFCO, LLC. (2003). 550 West Jackson Blvd., Chicago, IL 60661. The information contained in this report has been taken from trade and statistical services and other sources which we believe are reliable. REFCO, LLC. Does not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice. The principals of REFCO, LLC. and others associated or affiliated with it may recommend or have positions, which may not be consistent with the recommendations made. Each of these persons exercises independent judgment in trading, and readers are urged to exercise their own judgment in trading.

Reports and Expiration Notices

Source: MRCI

* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.

** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.

*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!