3 Reports That Should Indicate Continued Firming of Oil Prices

While the speculation is that short term inventories next week will rise, causing downward pressure on crude prices, I see an opportunity to add to my oil positions. Primarily I use Petrobras (PBR) and Exxon Mobil (XOM) to play the movement in crude prices.

Crude has had a good start to the year given all the headwinds to the economy. Many investors give the catalyst of increased summer demand as an explanation for recent firming of crude prices. A seasonal demand in most years is a given; however in this economy, consumers are seen as being severely impaired.

Seasonal demand is picking up steam. To confirm this I look to statistics from the Federal Highway Administration. February saw an increase in US motorists average daily driving, which is the first increase in 15 months, or approx the length of the current recession. Daliy mileage during February rose 2.7% from a year earlier, not to mention that this year had one day less due to the leap year calendar.

Too early to tell? Yes, it is too early to tell if the trend will continue. What is important is that the direction of the tide has shifted and a temporary floor for gas prices has been put in. We will need to see March numbers to confirm that the trend is continuing. In the meantime, quantitative easing should put pressure on the greenback. Along with contango demand, this should provide price support.

Also pay attention to Visa (V) and Mastercard (MA) earnings calls next week to gauge consumer spending habits, if you can read between the lines there is a lot of info pertaining to gas demand, etc. Mastercard periodically compiles a "spending pulse" report which is very handy in tracking consumer spending habits.

So use those dips from inventory increases to build up positions at weak prices while we wait for more data, because by then it will be too late to join the party.

Disclosure : Long PBR & VISA Shares, MA puts

Comments

[HardwoodFlo...:]

The whole "leverage" or margin option in the commodities market was designed for people that actually purchased and use the products in the market (e.g. refiners, millers etc). The problem with the current system is that to little risk is associated. You have to look at it the way the LBO guys on wall Street look at these propositions: what is the down side risk. Well if you only have to risk 10% to make a gamble how great is the risk? I think the margin requirements should be raised.

The idea that oil inventories are at the levels they are and pricing has remained relatively sound at $50 makes little sense to me. Remember the huge "contagio" scenario that was building up in Jan and Feb. Where is that oil now? Out on the ocean. That stuff isn't even in the "system" to be accounted for in terms of inventory. I'm no expert but i could see oil at $30-35. But what do i know I’m just a hick- but when things don't make sense they just don't make sense. Oil hanging at $50 makes little sense considering the inventory issues. Something has to give.

I don't want to destroy the price of oil- it should have a price like anything else that is determined by the market. The only reason I think they should raise the margin requirements is that I’m tired of "investors/speculators" being pariahs on the American Consumer. Last summer they brought the country to it's knees- for what greed.

Remember all the people talking their book: Goldman Saks saying oil would go to $240 and T-Bone Pickens saying the same.

I read somewhere that two guys from Stanford figured out that $11 billion could control World Wide oil through the options market. What self respecting hedge fund didn't have $11 billion last summer?

Apr 26 05:55 PM

[HardwoodFlo...:]

I love the whole "season driving thing" what a joke. so what! are we to expect that people drive differently in may than they do in say October? That and the whole chaos theory stuff: "there might be hurricans". All that stuff is designed for suckers.

Apr 26 05:58 PM

[PooBah_1:]

Just one point Mr Hardwood.

Oil inventory levels have been climbing as all that oil in floating storage has been 'put into the system' Look at PADD III (Gulf Coast)
inventories have risen 35 MMBO since late December. That is floating storage that was taking advantage of Contango but since that has narrowed they are selling it and bringing it for delivery.
The data is there, clear to see :
www.eia.doe.gov/oil_ga...

I won't argue that speculation has had an effect. But so have supply and demand factors. Look at the gasoline inventory in June of 2008. We were close to the brink there.

but..

Money is pouring into USO and OIL because of future oil price expectations. Most of the people in the market simply think that oil will go back up, and the easiest vehicle is the ETF's and part of the composition of the ETF is the current month contract. So, in essence a floor in the current month contract has been put in place by traders looking to lock in a low current price in the expectation of a december of january rally.

Is that legal, yes, is it manipulation, no. Is it speculation, yes. Is it wrong, who knows...

Those are my opinions, and my wife thinks I am right only about 3-8% of the time.

PooBah

Apr 27 09:59 AM

[The Greates...:]

People who have no jobs are not buying any new cars, they have no money. They are also not driving, no money, hence no driving. This whole world melt down economically, is due to the excessive greed and manipulation in the commodities energy market and can not be allow to continue.
The 12-month moving total for January is the lowest traffic volume (2,916 billion miles) in any month since February 2004. Further, the 110 billion mile reduction in the 12-month moving total since January 2008 (3,026 billion), represents about a $16 billion reduction in fuel costs for American drivers, at an average fuel efficiency of 23 m.p.g., and an average fuel cost of $3 in 2008.
The whole supply and demand story is bogus, as has been proven since the oil bubble burst. The oil industry is paying $75,000 a day to store oil in tankers trying to create another monopoly shortage like last summer. Does anyone really believe the ratio in the price of crude today in relation to the price of gas at the pump is in line with the cost? Oil goes down, gas goes up, so where is the logic in that?

Apr 27 11:22 AM

[PooBah_1:]

well Mr Greatest,

Do the math. Look at the data.

tonto.eia.doe.gov/dnav...

Correlation Co-efficient is very close. ( you will have to down load into excel, graph from that 2004 date you have and run statistics on oil price and gas RHOB Gas price. Gulf coast is better as the California blend is much more voltile due to emmision standards)

And the majority (or a lot) of tanker storage has been sold and delivered to PADD III already. Shell is storing a bit, but it's North Sea's 40's. Not coming to the US. Iran is also storing some, I'll give you that. But the supply and demand story is not bogus, and has not been proven to be bogus. Speculation and Supply vs. Demand worked in concert to drive up prices, and now they are working to drive down prices. Look at the data:

Gasoline Stocks are not that high...
tonto.eia.doe.gov/dnav...

You post a lot on oil stories, and I shouldn't feed the trolls, I know, but it looks like you look up some things but don't do any hard math. If you did, you might learn a few things.

Just my opinion.

PooBah

Apr 27 12:47 PM

[Dustinian:]

A good article and I agree. Your last paragraph sums up my thoughts exactly.

I too am long in Petrobras and have been waiting for a pullback to increase my position. This my be the pullback I've been waiting for. Perhaps I will wait to see if the price dips under $31.

Apr 27 01:37 PM

[Rohan C. Pease:]

My cost basis on PBR is 24.75, however I am a willing buyer @29, which I see as support and is approx 5% below the 50MA currently at 31.40. PBR has just so much oil and they have the smartest people working for them, (Engineers, and geolgist, etc. not just upper Mgmt.)

Many analysts discount the company's discoveries on the thesis that its too hard to get, too much pressure, too much heat, etc. They will access the oil, however their $174B 5 yr budget is a hurdle, but the costs are not out of line, however the analysts say they underestimate the costs.

Funding the budget is also discounted because of the current credit climate. Yes funding costs have risen, but Chinese investment has shown that they can get funding, and this wll raise their free cash flow. PBR says is takes about $37 oil to make the budget fesiable, I believe that is overestimated (1 point I agree with analysts) but $45 is more likely. In any case I can't see oil dropping below $45 bbl. If it does well, I guess the Chinese will just step in again to buy precious resources at fire sale prices while the developed countries weep watching from the sidelines, frozen in debt.

Apr 27 03:46 PM

[Naufal Sana...:]

Oil isn't a good play until the Fed has printed enough money to fill in all the deleveraging/deflationary holes in the economy. Only when rates once again rise (as the Treasury bubble deflates) will inflation really become a real issue again and will oil be a worthy candidate for big gains.

Crude is headed for February lows in the next several weeks. GDP in the US contracted 6.1% Q1 2009. That is horrendous. And with the swine flu outbreak, you can bet transportation will be halted to a bare minimum. Supply/demand.

Apr 30 12:51 PM