Despite the dip on Friday we can't complain about the last week. Oil futures rebounded from $61.25 the prior week to a new 7-week high at $67.30 on Thursday. Friday's decline in oil to just under $66 was likely just end of quarter profit taking. Traders bought the dip and the close for the week was right back near $67 at $66.70. We also saw some dips in energy stocks on Friday but I believe that was also profit taking and Google related. Index fund managers were forced to buy 18 million shares of Google at the close on Friday or about $7 billion worth. This means they had to sell $7 billion in other issues to make the books balance. This knocked -$5 off the S&P and about -.50 cents on several hundred S&P components. This appears to have blunted any tape painting or window dressing for quarter end. No harm, no foul.
Monday will be the key day for us. Funds should have been long energy in general going into quarter end. It makes them look really smart on the quarterly statements. Monday is a new quarter and those who feel oil may be over priced can immediately bail and go back to cash without having to tell the fund holders. If oil and energy stocks hold their gains on Monday then we can breath easier again.
The price pressures for oil remain the same. Iran, Nigeria, Norway, France, etc. Iran took a step forward with the UN giving them 30 days to abort their nuclear ambitions and return to the status quo from the last few years with full compliance and full inspections. I believe Iran is too far down the road to back down peacefully. They have made too many threats and have made their defiance public knowledge. If the Iranian leadership backs down now they will lose respect with the Iranian population. There may still be a negotiated settlement but there are none on the horizon at present. Iran has said they would halt oil exports if the UN imposes any kind of sanction. They have also said they would not play the oil card. It depends on what day of the week the question is asked and which way the wind is blowing. As long as the threat is rumored then Iran can say anything they want in public. I have no idea which way this will turn out but traders are afraid there will be a disruption of some sort. That is keeping oil prices high despite a temporary abundance of oil.
Inventories are supposed to build in March. That is no surprise to us as I have been warning you that it would happen for months. We planned on buying the dip and it has worked out very well in most cases. Some we were early on but we will deal with it over time.
The ethanol problem is growing and there does not appear to be an easy fix. With MTBE being phased out over the next few weeks there is going to be a shortage of gasoline and a shortage of ethanol. Prices are going higher with summer driving just ahead. I paid $2.59 for regular unleaded just outside of Denver today with diesel at $2.74. Higher prices and tougher emission rules means light sweet crude will be in even more demand than normal. This is pushing the price of sweet crude to near the panic levels we saw just after the hurricane levels last year.
Boone Pickens was on CNBC on Thursday and he said we would see $75 before $60 again. He has been exactly right for several years now. He pocketed $1.5 billion last year from his oil trades. He said $100-$150 over the next five years was definitely possible. He believes as I do that the current global production ceiling of 85 mbpd will remain despite all efforts to produce more. Depletion of older fields is offsetting new production coming online. China is expected to grow by +9% this year, India +8%. This will increase their consumption substantially. About 10 years ago China had only 1700 miles of paved highways. By 2012 they will have 55,000 miles. That is more than the US. Their gasoline consumption is going to skyrocket over the next five years. They are currently producing 300,000 cars a month for sales inside China.
The bottom line to all of this is simply continuing increases in consumption of oil and oil products and that consumption will exceed production very soon. Oil prices may rise and fall over the next couple years but the trend will still be higher. We need to remain long and weather these minor dips. Our patience will be rewarded.
Remember Titanium Metals (TIE) that I mentioned last week that a possible breakout was imminent? TIE did break and ran from $44 to $52 in three days before pulling back to $48.50 at Friday's close. Nice trade for those who took it.
Word to the wise. Earnings for energy companies are starting to be advertised starting in the third week of April. I expect strong results from the first batch and that could send us to a higher level across the board. However, if those results don't work out as expected we could see a round of analyst downgrades and a couple of ugly weeks. I believe any dip will be bought but we need to listen to the chatter as the next couple weeks pass in order to be properly positioned for the event.
May Crude Oil futures Chart - Daily
December Crude Oil Futures Chart - Daily
May Natural Gas Futures Chart - Daily
Natural Gas Futures Chart - Daily