The price band's back and we're going to be in trouble! Is the new price band for oil $60.00 on the low side and $70.00 on the high side? You remember the OPEC price band. Oh come on now, sure you do! You remember how it went; very simple really. OPEC set a high price and a low price.

OPEC's theory for a price band on oil prices went something like if the price of oil exceeded the high end of the price band for a certain number of trading days, then OPEC would automatically increase production. On the other hand, if prices fell below the lower end of the price band, then presto OPEC would cut production and wah-lah!, all would be well in OPEC’s beautiful world. A very easy to follow formula, in fact so simple, so transparent, so trader friendly, that it was welcomed by some as a great step forward in the history of the OPEC cartel. The only problem was that OPEC never actually followed the rules. In fact as prices rose above the price band and it came time for OPEC to pull the trigger, greed took hold. In fairness to OPEC though, demand kept rising and market conditions caught OPEC by surprise.

Trying to react to the oil market after the fact was a difficult proposition and was difficult as demand kept rising faster than expected. The once fixed price band became a floating price band. As prices floated higher so too did the price band. Finally it became so much of a joke that when the price of oil was trading $10.00 over the high end price, OPEC said lets face it the price band has been abandon.

Or at least that’s what they told us.

To the trained observer the price band probably never went away. It was just a lot higher than OPEC led us to believe. Of course OPEC was always more effective at defending the lower end of the price band to stop prices from falling than they were at increasing production to stop prices from going any higher. Yet through the sometimes murky comments by the OPEC you could really get a sense of where the bottom of the range was. For awhile it was $30.00 a barrel, then it became $40.00, then $50.00. Now it seems that the low end of OPEC’s price range is $60.00 a barrel.

How did I come to that conclusion when OPEC has kept its price band secret cards so close to its chest? Because yesterday, the OPEC President tipped his hand by saying $60.00 barrel oil is a fair price, yet if prices edge towards $70.00 everybody starts to get nervous. I wonder who he means by "everybody". Mr. Daukoru also said that a fair price is what markets can sustain.

The President of the OPEC cartel thinks $60.00 a barrel for oil is a fair price! So if that’s fair then I assume a drop below that level in his eyes most likely wouldn’t be fair. Not only wouldn’t it be fair, it would, more than likely, cause OPEC to cut back on production. Fair is fair after all. For oil traders that means that at least until the next OPEC meeting, $60.00 a barrel will act as a pretty good floor. On the other hand if oil prices spike up towards $70.00 a barrel, OPEC might worry and try to ease prices with either a little more oil or at least start spouting some good, old fashion OPEC rhetoric. Assuming of course they can do anything about it. A spike to $70.00 may be caused by a disruption, one that OPEC may or may not have the spare capacity to make up for.

Mr. Daukoru says he believes there is enough spare capacity. And he says there is a global supply surplus of about 2.0 million barrels a day. And if that is not an over supply, then he doesn’t know what one is.

In the mean time back at home demand for oil is once again heating up. The Department of Energy supply report and rebound in the ISM manufacturing index seems to be signaling another big spike in energy demand. The DOE reported that US gasoline demand was running at close to 9.0 million barrels a day, or up 2.5% over the same period a year ago. Demand for distillate was running 1.4% above a year ago. The build in inventories of crude was explained by a larger than expected drop of 1.4% in refining activity, signaling that refiners are really going to be getting deep into refinery maintenance.

The ISM manufacturing number, which in the past has proven to be a good forward indicator of energy demand, snapped back after a 3 month drop. The new orders index hit a 16 month high. The continued expansion in the US manufacturing index has really gone hand and hand with the run up in energy prices. And despite other economic numbers that have suggested a possible softening, the ISM index seems to indicate the economy is getting ready to snap back after the Katrina induced slowdown.

Some Nigerian hostages were released yesterday but the militants are continuing to make threats. The militants go by the name "The Movement for the Emancipation of the Niger Delta". Nice ring to it don’t you think?

Have we seen the lows for the month? Is it now just up, up and away? The seasonal factors are going the bull’s way. It looks like it's time to buy breaks! How muck of a break? Email me at pflynn@alaron.com to find out or call me at 800-935-6487 to open your account. Love the e-mails, questions and comments you send Keep them coming!

Buy April Crude at 6200 - stop 6010.
Buy April heating oil at 17200 - stop 17000.
Buy April unleaded at 15900 - stop 15700.
Buy April natural gas at 640 - stop 630.

Have a GREAT day!