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Last week we had monumental gains in several stocks after oil spiked to $70.85. This week oil closed at $64 but many of those same stocks are breaking out to new highs. All our positions are well into the green and almost every position is showing signs of another breakout coming. It does not get any better than this.

When I start thinking this way it is normally the day before a massive drop. Everything simply looks too bullish to be true despite the price of oil not confirming. The challenge is the damage in the gulf. As of Friday 60% of oil production was still shut in and 38% of gas supplies. The IEA said it could take 3-6 months to recover 90% of prior production. 55 million bbls of production is expected to be lost. As each day passes the extent of damage appears to increase as more platforms are explored. 20% of existing platforms and 12% of rigs are still evacuated.

Four refineries remain closed representing a 901,000 bbl per day drop in refining capacity. That is -5% of the U.S. capacity.

The 90 million bbls of oil and refined products available from the SPR and the IEA are headed for the U.S. and this is driving down the price of oil but this is only a temporary fix. The IEA is not going to keep depleting their reserves just because America is paying higher prices for gasoline.

This has setup a questionable position and outlook for me. I would like to think we are going to see oil companies continue to rise since the eventual conclusion is a permanent shortage. It is a flood of oil in the short term that bothers me. That 90 million bbls of product that will show up over the next 30 days is enough to float us for three months if we did not pump another bbl. This bothers me and makes me cautious. Traders tend to focus on the very short term and not the long-term problems. In the very short term oil could break $60 depending on the mix of products being delivered. There is also the question of where the products are going. Some of them are not coming to America and will be used to offset American exports to other countries. I know that sounds crazy but it is a matter of logistics that determines where each bbl of oil will go.

The bottom line is that we need to protect our profits while hoping for the various breakouts to occur. There were several upgrades of energy stocks last week and now that the initial hurricane hysteria is over it is possible that energy will remain the sector of choice despite the temporary loan of oil products.

Snug up those stops and don't let any money slip away.

Crude Oil Chart - Daily


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