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Commentary

Testing Resistance

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Crude has been very volatile over the last couple weeks but the one constant is the strong resistance at $66.75 and again at $68. That $66.75 level dates back to the gap down open back on April 3rd. It has been tested several times since but has remained firm and unbroken. That is also the 50% retracement level for the August high of $80.90 on this contract to the January lows of $52.73. As you can see in the chart below this may be a tough level to crack. Fortunately there is also a strong uptrend in place with several higher lows.

June Crude Oil Chart - Daily

I do not see any chance of materially lower prices in our future. Political unrest in various oil production nations, sporadic production outages and a much stronger appetite for gasoline should keep that uptrend in place. Throw in the approaching hurricane season and we should see a break of that resistance over the coming weeks.

The refiners are continuing to soar despite valuation downgrades to several. Tesoro and Valero are two standouts, which have failed to yield any ground despite the downgrades. Because of the strong gasoline demand and the many refinery problems the crack spread (profit to refiners) continues to hold at very high levels. At the beginning of April this spread reached $40 per barrel of oil. The spread is calculated based on the price of oil at $65.95 on Apr-2nd and the value of the gasoline produced from that barrel. In early April gasoline was being sold into the market at $2.52 per gallon. That equates to $106.05 per barrel minus the cost at $65.95 making the gross profit or spread $40.10. As of April 25th that spread had dropped to $26.91 per barrel but that is still well above the historical average of $7-$10 per barrel. Current refinery problems have removed nearly one million barrels of weekly gasoline from production and many of these problems will take weeks to be resolved. In the case of two refineries, Valero TX and BP Whiting, the repairs will take 2-3 months. In the Wednesday inventory report by the EIA refinery utilization fell -2.6% to 87.8% when analysts were expecting a slight gain to something over 91%. Gasoline inventory levels have fallen by nearly 30 million barrels since the last weekly gain in the first week of February. The current 12 straight weeks of inventory declines is extremely rare.

Natural gas continues to hold near $8 due to the colder weather in the northeast. I still believe that price will weaken despite a forecast of a hot summer. Current inventory levels are at 1,564 bcf. That is +267 bcf above the 5-year average but -287 bcf below last years exceptionally high numbers for this period.

Boone Pickens was interviewed earlier this week and continues to claim $80 oil or higher in 2008. He believes we are closer to peak oil than most analysts currently believe. He is targeting 86 mbpd as the expected global production peak and that is not far above our current rate of just over 85 mbpd. Time will tell if he is correct but even if he misses it by a year or two it will still arrive with almost everyone unaware of its coming.

I believe peak oil will solve the global warming crisis. Once global oil production begins to decline and oil prices pass $100 a barrel we will see forced conservation on a global scale as well as a major change in driving habits due to $6-$10 gasoline. Smog and pollutions from gas guzzling autos will cease to exist. The world as we know it will change drastically over the next 20 years and nobody can stop it.

Earnings from the energy sector have surprised to the upside for most of those already reported. Several of the majors reported rocky results due to lower global production and the cheaper price for oil. They tried to blame it on oil prices but their falling production numbers were an ominous sign of things to come.

I mentioned earlier in the week that Exxon had completed the longest well on record at just over seven miles long/deep. (37,016 feet in 61 days) The majority of that well was drilled horizontally under the ocean. The cost and complexity of producing oil will continue to rise as proven by this well.

Since we are well positioned for the summer rise in energy and an exit in September I am going to continue to add some non-energy plays to capitalize on other markets.

Jim Brown


June Crude Futures Chart - Daily

June Gas Futures Chart - Daily

June Gasoline Chart - RBOB Daily

 

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