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According to AAA, the average nationwide gasoline price hit another all-time high a couple of weeks ago at $3.22/gallon, besting its previous record of $3.06/gallon on August 11, 2006. Some are calling for energy prices to continue to move up calling for $4/gallon gas. Well, allow me to add some fuel to the speculation fire (pun intended).

Over the last eight months, we have seen an uncharacteristic draw in energy inventories which makes a solid case for higher energy prices this summer. Before I continue, let me provide a quick primer on the nature of energy inventories and shoulder seasons.

We just completed the spring shoulder season for energy commodities. There are two shoulder seasons each year, one in the fall and one in the spring. During these periods, the demand for energy commodities tends to dip as people drive less and less energy is required to heat or cool their homes, businesses, ect. With depressed demand typically comes increased inventory but not this year. Lets take a look at how energy inventories have behaved this year compared to the previous six years (1).

Average build in inventories from the end of September till the end of May for the previous 6 years: 4.9% or 31M BBLs. The decline in inventories from the end of last September till the end of this May: -4.1% or 28M BBLs.

Therefore in a typical or average year, inventories should be approximately 9% or 59M BBLs higher than they are today.

Back in December I noticed that inventories were being depleted at a more substantial rate than in previous years. Initially, I originally thought that this was a hangover from the massive builds we saw last summer and early fall, but I decided to start studying it more closely and discovered a disturbing trend. For my research, I calculated the difference in draws/builds of inventories from the start of the fall shoulder season, through the winter until the end of the spring shoulder season. As you can see above, the average build from 2000 2006 was around 5% through this time period. This year however, we saw a draw of just over 4% - a 59M bbl difference.

So this begs the question, what is the underlying cause for the unusual decrease in supplies? Was there any short-term impetus or does this signal a breakdown in the fundamental supply and demand for energy inventories leading to higher prices? Unfortunately, the answer is No, there was not a short-term reason for inventories to be depleted!

Lets quickly examine the usual suspects that result in a short-term draw of inventories.

Weather:

Energy inventories declined during most of the winter despite an unusually warm climate. With the exception of a bitterly cold February, the winter was exceptionally mild. Especially in December through January, there should have been a continuing build but instead there was a draw.

Furthermore, the weather last summer was not responsible for any sort of supply disruption (i.e. Hurricanes). Unfortunately, this year might be different situation. Accuweathers Joe Bastardi is warning of the potential for significant storm activity in the Gulf coast. He is quoted as saying on the Accuweather website:

Well see storms on the prowl in the Gulf again. The entire region including New Orleans and other areas that are still rebuilding after Katrina is susceptible to landfalling storms. Of concern to consumers everywhere is that there is so much oil and natural gas drilling and refining occurring in the Gulf. This years stronger storms are likely to cause the kind of disruption that will be felt in wallets and pocketbooks.

Global Geo-politics:

On the geo-political front, no news is good news for energy prices (good news meaning declining prices for the consumer). Even though the War in Iraq is turning into a complete debacle; there hasnt been any significant disruption in supplies stemming from turmoil in Africa or South America. I believe its a bit too idealistic to think that the relative lack of violent activity from these regions will continue. Any sort of flare up in Africa, Latin America or the Middle East could cause major supply disruptions. Ironically, higher prices may lead to increased volatility in the region as greed will provide the necessary incentive for militias and unscrupulous political leaders to mix it up.

Doug Casey, a well-known commodity analyst, wrote an interesting article on our growing dependence on African Oil and how the instability in the area could impact energy prices. Conclusion:

When you combine the effects of a mild winter with a lack of supply disruptions overseas, we should have seen a solid build in energy inventories over the last eight months. But we didnt and that should be alarming!

There is a litany of reasons that could explain why energy inventories were depleting when they should have been building. But without any short-term impetus (2) causing inventories to decline, the most plausible explanation is that the long-term fundamental case for rising energy prices is strengthening. Supply is simply not keeping up with demand if supply is growing at all. According to T. Boone Pickens, perhaps the markets most renowned energy analyst, the world is producing 85M bbls/day and the world is consuming 85M bbls/day. There is no room for demand growth or supply disruptions!

Furthermore, he along with well-known investors such as Jim Rogers and Matt Simmons believe that the elephant fields in the Middle East and Latin America are declining in production a theory known as Peak Oil. (Matt Simmons has written a book called Twilight in the Desert that defends the Peak Oil theory). These regions have used various means of increasing short-term production to mask the longer-term fundamental issues with their capacity. Pickens is calling for $85/bbl oil by the end of this summer and given the sizable draw over the last eight months, it wouldnt surprise me if he is right.

Fortunately, for the average investor, there are several means of profiting from the rise in energy prices without venturing into the tricky world of commodity derivatives. Oppenheimer Funds offers significant energy exposure though its Commodity Strategy Total Return Fund, ticker symbol QRAAX (A-share) or QRAYX (No-load, investor class share). Approximately 2/3s of the fund is comprised of energy futures. If you want pure exposure to energy, there are few ETFs that you can use. IPaths OIL and United States Oils USO are two offerings that are pure crude oil plays. If you would like a fund that has diversified exposure to energy futures, Proshares offers an ETF, ticker symbol DBE, that invests in Crude, Distillate, RBOB Unleaded Gas and Natural Gas futures. Each commodity comprises approximately 25% of the fund.

1) Calculation Data: I track inventory levels by adding the total inventories of Crude, Distillate and Total Motor Gasoline provided by the Energy Information Administration. Percentage changes in inventories was calculated by taking the difference in Weekly Supply Estimates from the June 1st reading and the September 29st and then dividing it by the September figure.

2) The financial media has consistently blamed short-term declines in refinery utilization for higher gasoline prices. The fact is that refineries operated well beyond their normal capacity last year in order to bring gas prices down for the election so that energy prices would be a non-issue. Refinerys are now paying the price and having to shut down for unscheduled maintenance since they didnt perform scheduled maintenance last year. Furthermore, the build in crude inventories has been minor compared to the depletion of gasoline stocks.

Matt McCracken is a principal and founder of McKinney Avenue Capital a Registered Investment Advisor based in Dallas, TX. He serves as a fee-only investment adviser for individuals 401k plans and trusts

[Recently published in Qi journal - Winter/2006] Part 2 of 2

What good is such practice? Some might ask in our busy yang energy go-get-em world. Creativity and inspiration come from the unseen, the yin, the receptive, the intuitive. Albert Einstein once said, "Imagination is more important that knowledge." Einstein didn't devalue the masculine or yang consciousness, for he also defined success as "10% inspiration and 90% perspiration." However, he did exalt the yin, feminine, intuitive consciousness as the MOST important. For without that all important "spark" of awareness or inspiration which can only come from quiet contemplative thought, the 90% perspiration would be as purposeful as a "busy" hamster running around its endless wheel that leads nowhere. Just as many of the world's actions today are resulting in environmental and political messes that could easily be avoided, if preceded by deep "contemplation" before action occurs. Too often our endless business (busy-ness) is not purposeful at all as far as solving our global problems, but to the unaware observer the decision makers look "very important" and "very busy."

Mind/body sciences like yoga, and tai chi, and qigong (energy exercise), are designed to allow the flow of life energy to permeate the mind and body, and to create a "receptive/open state of mind in the practitioner," a passive alpha state of awareness. Qi, life energy in Traditional Chinese Medical science, is a subtle unseen power that emerges from the very fabric of the subatomic field that makes up all matter, and permeates all things including human beings. Acupuncture, and Chinese herbal medicine, as well as physical exercises like tai chi & Qigong are designed to open the flow of life energy through the mind and body. yoga and Ayurvedic practices are designed to do this as well.

In this field of life energy all things are connected, and therefore insights from this pure consciousness can be powerfully complex solutions that seem simple and elegant and obvious, once they come to mind. Yet offer more comprehensive communally beneficial solutions to challenges facing the practitioner cultivating this "field" awareness in themselves through these ancient practices. tai chi may help cultivate such intuitive, receptive states of mind if taught to that end. tai chi, incorporated with gentle deep breathing, and physical loosening, and mental images of constantly "letting go" of everything enables this unseen force of the universe to flow through us, emanating from every cell and atom of our being, and expanding effortlessly from each airy fold of the tissues of our mind. We can allow every atom of our being to glow with and be permeated by this energy of life as we move through the flowing motions of tai chi "without purpose," "without analysis," "without grades, or self judgments." But rather, only for the sheer pleasure of being, while experiencing the thousands of wonderful sensations tingling and percolating through the body. tai chi becomes an effortless "self massage" that flows through the yielding heart, mind, and body. This state is not "directed" by the mind, but allows the mind to let go and be massaged by the pleasant sensations flowing through it, holding on to nothing, not analyzing or even naming the sensations caressing, washing the mind as they flow through receptive awareness.

Today's current knee jerk reactions which get us individually into such trouble on crowded freeways, or in global trouble as a nation in an increasingly crowded world, have been cultivated over centuries of under-developing our feminine or yin consciousness. Our television pundits automatically react and narrow dialogue without even being conscious of it. In a three month period leading up to the Iraq war, Fair Media did a study of major news networks coverage of the impending conflict. They found a disturbing reality, that over 90% of the talking head guests on their news shows were already assuming there was a war to be fought, and discussing war strategy. Only less than 5% of the talking heads were opposed to, or even skeptical, about the idea of going to war. This hard charging into action, rather than "contemplating", is an example of the result of centuries of male energy being accepted and extolled, and yin or feminine energy being dismissed and considered "indecisive" and "weak minded."

The pool of "receptive" sensation that tai chi or other ancient transcendental technologies can bathe us in again and again, day after day, enables the subtle possibilities and gentle power of the yin and feminine to permeate our being and consciousness, and through that, affect our actions in the world. It can change the way we function, so that rather than charging into personal, or social, or national decisions, we instinctively "contemplate" and "intuit" all the possible outcomes of that action "BEFORE" taking that action. This could keep us out of costly wars, and reduce futile quests to find where on earth to dump thousands of tons of highly toxic nuclear waste that will be poisonous for tens of thousands of years. It may open us up to more subtle "yielding" approaches to international relations, that can get us the desired results through the subtle dance of negotiation which entails "listening" before "acting," which is a very yin or feminine quality. It may draw us more to "passive" energy solutions like "solar" or "wind" that could easily solve all our energy needs, and we would never need to fight anyone anywhere over the sun or the wind, which is available to all equally.

Transcendental mind/body technologies like tai chi, yoga, transcendental meditation, chi Kung, etc. can today be made available to billions of people worldwide at a time when the world desperately needs to learn to find a balance in the deepest part of our being, a balance that extols the subtle and quiet power of the feminine or yin aspect of who we are individually and as communities and nations. tai chi and yoga, for example, are now taught in virtually every nation in the world, and can perhaps now contribute to solving humanity's hunger for balance between the "male" and "female," between the "yin" and the "yang."

Generations may look back and see that tai chi & yoga teachers of today played a pivotal role in human history. Or perhaps the changes they are making in the world are so subtle and gentle, that they will never be recognized but nevertheless . . . will ease the world into its next wave of evolution enabling it to survive the weight of six billion plus inhabitants, without creating chaos through rash actions.

Bill Douglas is the founder of World tai chi & Qigong Day, and author of the best selling tai chi book, "The complete Idiot's Guide to T'ai chi & Qigong" (Penguin Putnam), and presenter in the world acclaimed dvd instructional "Anthology of T'ai chi & Qigong: The Prescription for the Future."

Contact Bill, or learn more about World tai chi Day at http://www.worldtaichiday.org