The midweek bounce in crude to $74 was knocked back to $72 by Friday's close. While that does not appear to be a serious drop the profit taking in the energy stocks was ugly. There were some major dips and there was little sign of a rebound going into Friday's close despite a late afternoon firming in crude.
If you read my weekend commentary in the Option Investor Newsletter then you know my feelings that the profit taking was driven by funds exiting option positions before next week's expiration. This is typical in an earnings cycle but many traders/commentators overlook it when trying to explain market anomalies four times a year after earnings.
Regardless of whether I am right or not we took some hits in several positions. Without a new high in oil soon there are some that may not recover. Crude has now posted its second lower high since the late April $75.35 high. If we don't get a quick rebound next week it could be uncomfortable.
Fortunately I expect that rebound due to the rapid build in gasoline demand and the approaching hurricane season. If the inventory numbers on Wednesday show demand growth then we should be set to test the old high before Memorial Day. Investors forget we have nearly one million bbls per day of light crude offline around the world for a variety of reasons. None of which will be solved soon. Now that refinery utilization is back over 90% we should be sucking crude inventories at a rapid pace. There is 202,000 bpd more refinery capacity today than in 2005 due to expansions at several facilities. Still, the refinery utilization rate at 90.2% today is less than the 91.8% rate for this time last year. Refinery crack spreads have fallen from the 63 cent per gallon high we saw on April 19th to 31 cents on the spot market last week. This will eventually fall to something in the 20 cent range as all the refineries return to full capacity and represent a -40 cents reduction in the price of gasoline. All hurricane damaged refineries except for the Murphy refinery are back in operation although at reduced levels. On the surface this would appear bearish for refinery stocks.
However, crude imports were 10.007 mbpd last week and -3.1% below last years levels. Domestic production averaged 5.128 mbpd but that was -6.6% under 2005 levels. Those numbers should improve if Shell gets the Mars platform back online by the end of May as expected. That platform should initially produce about 130,000 bpd until full repairs are completed.
What will continue to support prices is the unrest in Nigeria, falling production in Iraq and the Iran nuclear confrontation. As long as Iran keeps bringing up the Strait of Hormuz in official conversations the price of oil should hold. We also have declining production in places like Venezuela, the fifth largest exporter to the U.S., and Mexico. The approach of hurricane season will also add risk to the price. An early season hurricane in the Gulf would be the worst possible scenario. According to the final MMS report on the 2005 hurricane damage nearly 20% of annual production was lost and almost 20% of oil production will not be back due to the excessive expense to replace old platforms. Chevron is donating its damaged $250 million Typhoon oil platform to the Interior Department to be turned into an artificial reef. Typhoon had a capacity of 40,000 bpd and 60 mmcf per day. The platform, built in 2001, capsized in 2000 ft of water during Rita and cannot be salvaged.
Typhoon before Rita
Typhoon upside down after Rita
The next time somebody complains about oil company profits remind them about a $250 million investment that is being turned into an artificial reef. Or maybe about the $15 billion in assets Venezuela just took over with the stroke of a pen.
I am going to start broadening the scope of our plays to include a few more mineral plays like PCU. This will insulate us from having only energy positions. I am also taking advantage of the Friday dip to add another oil position, Petrochina. I have been trading it recently but the outlook for PTR has been improving so rapidly I think it is worth a long-term hold.
We exited the PBR position on Wednesday when our trailing stop was hit at $105 for a +$10 profit. I tightened the stop last week due to all the negative events coming out of Bolivia. Glad I did after this week.
I am going to start removing some non-performing positions in anticipation the end of summer decline. We have several with August/September calls instead of LEAPS and it is time to start planning our exit.
June Crude Oil futures Chart - 360 (bad tick on daily)
December Crude Oil Futures Chart - Daily
June Natural Gas Futures Chart - Daily
Natural Gas Futures Chart - Daily