Option Investor

Never a Dull Moment

Printer friendly version

The volatility in the expiring January contract has been huge and there are still six trading days before the contract expires. With $3 to $5 intraday moves this has been a moneymaker for traders and a heart breaker for those users trying to hedge their future crude purchases.

The OPEC meeting went about as expected with no change in output after prices fell -$12 in the week before the meeting. OPEC continues to claim there is plenty of oil and for the time being they are right. Prices on the January contract have support at $88 and again at $85 but some traders believe year-end volatility could see a retest of the $77-$80 range.

We need to remember that this is the heavy demand season in the northern hemisphere and that demand will begin to fade in early March. As that demand fades the refineries will begin to switch over to summer fuels and away from heating oil and winter blends. This is normally a price lull period before summer.

Personally I believe we had a great week even though crude prices were all over the map. We had four positions that gained more than $10 each and quite a few that gained several dollars each.

Changes for the week

The big news was the announcement by several companies of increased capex spending plans for 2008. This helped the service companies like FWLT and JEC but the good news rubbed off on almost everyone.

You would think with an 8 million barrel drop in inventory levels for the week we would be testing $100 once again. That massive drop was the 6th drop in 7-weeks for crude inventories and the largest drop in a year. Inventories are now 8.8% lower than the same period last year and at their lowest level since March 2005. Crude imports fell by 1 mbpd to 9.4 mbpd and that was the contributing factor in the inventory decline. The extreme fluctuations in imports suggests some challenge in shipping and that is likely to be reflected in a strong rebound next week as that supply chain overcomes the challenge.

Helping keep a lid on prices was a sharp spike in gasoline inventories by 4 million barrels. Gasoline demand is remarkably weak and 211,000 bpd below the same period in 2006. This is due to higher prices putting a crimp in driving habits. U.S. crude demand for September was 0.8% below year ago levels at 20.385 mbpd and the lowest month since April 2006. September was the 4th consecutive month of year over year declines.

Crude levels at Cushing OK rose by 2.5 million barrels over the last 3-weeks. This is the delivery point for WTI futures and that suggest purchases are weak.

On the geopolitical front Hugo Chavez was defeated in his dictator for life quest and that may signify the beginning of the end for his reign. He can remain in office until 2012 but with his ego bruised and opposition mounting he is not likely to be an additional threat to U.S. crude supplies any time soon. Inflation is running at 21% and crude production is down 1 mbpd since 2002. Given his recent nationalism of the oil fields and projects odds are slim that any outside firm will be willing invest time and money in the near future. Chavez is trying to get China, Russia and Iran to help him develop the Oronco heavy oil projects without much luck.

A highly controversial report claiming Iran dropped their nuclear weapon plans in 2003 removed some of the concern that the U.S. would move to attack Iran before the end of President Bush's term. This cooled tensions in the area and took some support away from oil. The report was major news on all the wires but the background is very unsettling. Turns out the author and his sources actually had no inside information and the details were gleaned from one high ranking Iranian defector that many think was a plant to focus attention away from Iran. The report has been labeled fictitious by many who have access to the background material..

OPEC officially assigned a quota to Angola and Ecuador, both newcomers to OPEC. Both had been operating without a quota since their entry. Angola was assigned 1.9 mbpd and just slightly over their current production of 1.8 mbpd. Angola said it had plans to increase production to 2.0 mbpd in 2008. Angola had said it would be happy with a quota of 2.5 mbpd but officials said that was 500,000 bpd more than expected real capacity. Ecuador was assigned 520,000 bpd and crimping that countries plans for expansion. Reportedly Ecuador plans on increasing capacity to 530,000 bpd by 2009 but private estimates say that is doubtful. Since Ecuador took over Occidental's operations in May-2006 output from those fields has dropped 15,000-20,000 bpd. They will find it difficult to obtain new investment in their fields after kicking OXY out of the country.

BBP and Husky Energy signed a $6 billion deal to partner in developing the Sunrise oil sands field in Alberta Canada. BP will gain 50% interest in Sunrise and Husky will gain a 50% interest in BP's Toledo oil refinery. The Sunrise field is expected to begin production in 2012 and build to 200,000 bpd by 2020 with a 40 year production plateau. This is a steam assisted gravity drainage (SAGD) operation. Pairs of wells are drilled with steam pumped into one thereby heating up the oil underground, which then flows into the second well for withdrawal. It is a slow and complicated method but oil will be $200 a bbl before they achieve full production so it is worth the effort.

The house passed an energy bill last week but it will be DOA in the Senate in its present form and Bush has vowed to veto it if it does make it out of the Senate. The bill changes the mileage standards to 35 MPG by 2020 and expands the biofuels mandate substantially but limit the amount that could be made from corn. It would also require utilities nationwide to produce 15% of their power from renewable sources. It includes new taxes on oil companies of more than $20 billion. Legislators just don't understand that higher taxes on energy companies will lead to less domestic exploration and higher prices at the pump. We need more exploration not less.

Jim Brown

January Crude Futures Chart - Daily

January Natural Gas Futures Chart - Daily

January Gasoline Futures Chart - RBOB Daily


Leaps Trader Commentary Archives