The first ever oil ETF, symbol USO, will begin trading at the open on Monday. It will be the first time retail traders will be able to capitalize directly on the price of oil without having to trade futures. The arrival of this ETF has been expected for months with heightened expectations over the last several weeks. I believe this will cause even greater speculation in oil and oil stocks by association. The operators of this fund should have a base inventory of crude futures already in place but a huge amount of retail buyers on Monday morning could require the operators to acquire more. I am hoping for a bounce in the futures Sunday night to get the week off to a good start for the ETF. It should bring the sector a lot of additional visibility.
Last week was a very strong week for oil despite being locked in a $2 range between $66 and $68. The high was $68.20 on Thursday and I consider Friday's rebound somewhat remarkable given the gain over the last three weeks. Profit taking was sharp but the dip was quickly bought indicating a lot of buyers hoping for an entry point.
The oil inventory report on Wednesday showed a sharp drop in gasoline of -4.4 mb and a -2.5 mb drop in distillates. Crude oil rose +2.1 mb but refinery utilization dropped to 85.9%. This compares to 94% for the same time last year. The amount of capacity offline is larger due to an extended run time at flat out levels after the hurricanes and the need to convert to a new product blend for summer. There are still three refineries offline due to hurricane damage. The removal of MTBE and addition of ethanol is proving to be troublesome. The new low sulfur diesel is also providing problems for refiners. As of August 2004 all diesel fuel was required to have less than 500 ppm of sulfur. As of January 2006 that level was reduced to 50 ppm with a target of 15 ppm by July 1st. This is called Ultra Low Sulfur Diesel or ULSD. The eventual requirement calls for a reduction to 15 ppm for all diesel by September 1st. The EPA had extended the deadlines for conversion to ULSD from July 1st to Sept 1st for refiners and October 15th for retailers due to refiner problems. Since there is not enough ULSD available for all truckers there is a plan in progress to allow different levels of diesel to be used depending on whether trucks are driven in town or on the road. Needless to say there is confusion among the ranks. Refiners expect continued shortages for a long time. Some refiners will drop the product rather than make the costly changes required to bring their antiquated facilities up to speed. This will keep prices high and indirectly provide support for higher oil prices for light sweet crude. This is the type of oil that most easily converts into low emission fuel. There is plenty of heavy sour crude available at cheaper prices and refiners like Valero will benefit from the wider spreads.
Senators Specter and Kohl have introduced a bill that would outlaw oil cartels like OPEC. Seriously! They seem to believe that by allowing the Federal Trade Commission to sue OPEC for price fixing we can force them to sell us oil for a fair price of our choosing. This is so unbelievable is boggles my mind. I can almost hear the laughter coming from Iran and Venezuela now. The only way to get oil prices lower is by using less and that has not been working well for the US consumer. We consume 25% of the world's oil and contrary to Specter and Kohl's intentions we cannot set the price. Nobody has to sell to us. Period. Obviously these guys have been in office too long. Kohl is 71, Specter 76.
The president of Nigeria said Friday that damage to facilities my militants should be repaired by the end of April. That damage is currently keeping 500,000 bpd of light crude off the market. Shortly after the announcement the militants renewed their pledge to remove 1 mbpd from production. They also stepped up their attacks on offshore platforms as they broaden their attacks on oil facilities.
Ecuador joined the ranks of Bolivia and Venezuela in changing the terms of the contracts with major oil companies. The Ecuador Congress passed a law giving the government 60% of the profits whenever oil prices exceeds set levels. The energy minister said if any company did not want to continue in Ecuador under the new law Ecuador would find somebody that would like to take their place. He said other companies would want to enter their oil sector including firms from Colombia, India and China. "We cannot permit someone from abroad (existing international oil majors) to impose rules over national riches." Under the previous contract the government received 20% of the profits. Occidental Petroleum (OXY) said the new law was a heavy blow that could lead them to reconsider investment plans. Evidently Ecuador has not learned the lesson of Venezuela. Changing contracts at will keeps companies from investing in infrastructure and oil production will eventually fall. Only the promise of profits keeps the majors interested when billions of dollars are at risk.
After the close today SLB and ATW split 2:1. Schlumberger is a current play but Atwood is not. Nabors Intl (NBR) will split 2:1 on the 18th, APC 2:1 5/26 and TLM 3:1 5/30.
Gas prices tumbled to support at $6.75 on Friday after spending much of the last three weeks trapped between $7.00-$7.60. It was a drop that had to occur given the insane levels of gas in storage. Winter is rapidly drawing to a close and we have 72% more gas in storage than normal. This is not a factor of strong production but simply the warmest winter on record for several decades. We should see continued gains in storage levels but once summer cooling demand arrives the utility companies will be extracting it in record amounts. Any April/May dip in prices should present a buying opportunity for the summer and fall demand cycle.
Oil prices are holding near $68 and I am hoping buying for the oil ETF will break that resistance. However, much stronger resistance awaits at $70. I doubt that will be broken until the summer demand begins to build and that could be another month. Refineries need to come back online and begin drawing down the current oversupply of crude.
For next week I would be happy if support at $65.50 holds and any breakout would be icing on the cake. I am not expecting any monster gains but would be happy to claim them if they arrive. Earnings in the energy sector will begin soon and could stimulate some further buying if they remain strong. Since prices held over $60 for the entire quarter (May contract) there should be some strong earnings. Refiners with plants still offline could be the exception. Conoco has a refinery offline for seven months and counting.
Since we were triggered on the CSX entry last week I am dropping Headwaters to make room.
Keep the faith and buy the dips!
May Crude Oil futures Chart - Daily
December Crude Oil Futures Chart - Daily
May Natural Gas Futures Chart - Daily
December Natural Gas Futures Chart - Daily