Option Investor

Crude Lives!

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After testing the range for a week crude oil sprinted higher on Friday for a +2.70 gain from Thursday's lows to close at $72.75 in after hours. There were multiple reasons for the sprint including Iran, Nigeria, OPEC and three different refinery outages.

As I mentioned on Wednesday night I did not believe Iran had a snowballs chance in Hades of accepting the US proposal to stop enrichment and talk. Iran fired back on all fronts as the week progressed with President Mahmoud Ahmadinejad saying we would never give up our rights to nuclear research. His deputy chief of Iran's Atomic Energy Organization said Iran would never accept a cap on enrichment levels as some had suggested. Iran claims it only wants to generate electric power which requires a 5% enrichment level. Uranium enriched to higher levels cannot be used for their reactor technology.

The various statements from the UN council make it clear that Russia and China are not onboard for any material sanctions. Putin said he would not support military enforcement under any circumstance. Britain also issued a statement ruling out military force. It is doubtful China would ever allow it since they are now partners with Iran in some oil ventures. It is going to be a long road to the end of this problem but all parties admit that the next stage could last only a couple weeks before being submitted to the Security Council for action. It should provide a fertile birthplace for new geopolitical concerns and the potential for higher oil prices.

Gasoline demand snapped back to prior levels ahead of the holiday weekend and all indications point to strong holiday driving despite the $3 gasoline. The inventory levels we get next Wednesday will be critical to further price increases for crude. If demand over the holiday weekend increased then supply disruptions from the various refinery outages could create a draw in inventory and fear of shortages as the summer progresses.

Hurricane season is upon us but so far no storms have formed in the Gulf. We are very early in the season with five months to go. Once that first storm forms anywhere near the gulf prices are sure to rise again.

The Minerals Management Service said Thursday that 79 platforms were still offline in the gulf. This represents 22% of gulf oil production and 13% of natural gas. Once the Shell Mars platform is restarted over the next several weeks those production shortfalls will drop considerably. Hopefully they get it running again before the next hurricane hits.

I would not be surprised to see $75 oil this week and $80 this summer. However, the last time I said that something happened to change the outlook and prices crashed. It will be interesting to see how the summer progresses.

I mentioned in the Option Investor Newsletter this weekend that several oil stocks appeared to have formed a bottom and are threatening breakouts. This is a positive sign after the beating they took from the May correction. Some of the potential candidates would be DO, RIG, HP, HAL, CAM, MRO, VLO, GRP, HYDL, NFX, OXY, PXP, SLB, MVK, SWN and THE. I am not going to load up the portfolio again but several of those would make good plays if you want to do your own homework.

We currently have 15 positions plus one I am adding today. That is plenty for this time of year. We need to nurse several back to health after the May correction. That should keep us busy.

Oil Service Index - Daily

July Crude Futures - Daily

December Crude Oil Futures Chart - Daily

July Natural Gas Futures Chart - Daily

December Natural Gas Futures Chart - Daily


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