Crude Oil: Bull or Bear?

The Energy Information Administration (EIA) report on petroleum comes out every week. We cover this report, to help us understand what is happening in the market.

Last week saw crude oil dip in price then turn higher Friday. Why? There were general concerns about the economic recovery, the market was trading lower and the dollar was up relative to other currencies. But, inventories are down. Since May 1, the crude oil inventory has been down every week except one.

Does this mean oil is going to go higher? The trend is clear in inventory. Oil traders are looking at demand. The inventories in gasoline and distillates (diesel fuel, jet fuel, kerosene) have been increasing.

This is indicative of an economy that is not recovering. Consumers are not driving as much, hence gasoline demand is down. More importantly, goods are not being shipped. Truckers and trains are the largest users of diesel fuel. Rails and trucking companies have been removing capacity from the system due to lack of demand. Burlington Northern (BNI) reports freight volume decreased by more than 20% in the second quarter.

The consumer is not flying as airlines report lower passenger counts. United Airlines (UAUA) reported a 7.5% decrease in revenue passenger miles in June compared with last year.

Can we have a recovery without an increase in shipping? No. Our economy is increasingly reliant on electronic means of delivery, information passes at the speed of light. However, raw materials, capital goods, food, consumer goods all have to be moved from their production to the consumer.

Will oil get cheaper until the economy recovers and shipping increases, which increases usage of fuel? Maybe. The futures market looks to the future, discounted by the carrying costs until the contract delivery date. The market must also look at supply.

OPEC has set production quotas for members. Exploration for new supplies has been severely curtailed because of low prices and regulatory uncertainty. Would you spend money looking for oil or gas with congress threatening tax changes and punitive cap and trade legislation? Mean while production from existing wells declines each year making us more dependent on imports.

According to the EIA, crude oil inventory declined by 2.8 million barrels last week. You can consider the increase in gasoline (1.5 million barrels) and distillates (600,000 barrels) inventories of if you like, but we still end with 700,000 barrels less than we had when we started the week.

The U.S. inventory of crude oil has declined by more than 30 million barrels in the last two months. If this trend continues, by September our inventory will be below the average range for crude oil stocks and approaching 2008’s days of supply. By December 2009, we will be below both. The two charts below graphically depict our oil stocks and days of supply.

I have, and continue to call oil “the trade of the year”.

Last year I signed up on the American Solutions website in support of the “Drill Here, Drill Now” campaign. You may recall that President Bush lifted the executive ban on offshore drilling. The regulatory process requires a comment period, before decisions can be made on where to lease and drill.

Guess what? The Interior Department does not have an email address for public comment. That is one way to limit input that they really do not want to hear. You can visit the Interior Department or American Solutions, investigate for yourself.

“Experience is that marvelous thing that enables you to recognize a mistake when you make it again.” (Franklin P. Jones)

Disclosure: We own DXO, USO

Comments

[redbaron:]

I believe in the overall concept of peak oil, and agree with the general comments of this author. In the near term, there is not a substitute for oil, and the options available are not being pursued fast enough to offer any real alternatives to using oil for transportation. I believe oil price will continue to trend upward, as the decrease in inventories will not be offset by any meaningful further decrease in demand. But, alas, I could be wrong.

Jul 19 08:05 AM

[redbaron:]

One other thought, It is not the Interior Dept that needs to decide to drill here, and now. It is the oil companies. The oil companies will drill where they have, 1) the best chances of success, 2) the least cost, and 3) the most favorable access to transportation and marketing. This is not a political decsion, it is an economic one.

Jul 19 08:09 AM

[don2m:]

"This is not a political decsion, it is an economic one."

Au contraire..........it is a political decision first then an economic one.

Jul 19 08:48 AM

[CaptainJJack:]

I agree.

This is a business issue, and I have never seen any oil company even suggest that opening new areas for drilling would make a significant difference in our oil dependence.

Of course they advocate for more areas to drill because it is in their self interest to do so.

But, there is a WORLD of difference between saying that more available land will make a significant difference to the oil companies future compared to making a significant difference in the US dependence on foreign oil.

Moreover, when it comes to natural gas, a more enlightened policy allowing more TIME to drill on already leased lands is probably far more important than opening new areas

Boone Pickens has it about right. We SHOULD allow more areas to be drilled, but that will not come close to solving our oil dependence.

Conservation, encouraging the use of natural gas in transportation (although, given that natural gas is such a WONDERFUL source for heating and cooling, I hope this is temporary), and alternative energy where possible are the things that will make a difference.

Opening up new areas for drilling will help, of course, but the effects are PUNY in comparison. The world uses 1 billion barrels over oil roughly every 12 DAYS, the US uses 1 billion barrels every 1.5 to 2 months.

The BEST case for ANWAR, is 15 billion barrels, and no other area is close to ANWAR in terms of availability in the nearer term -- which is why it is at the top of the list for the oil companies.


On Jul 19 08:09 AM redbaron wrote:

> One other thought, It is not the Interior Dept that needs to decide
> to drill here, and now. It is the oil companies. The oil companies
> will drill where they have, 1) the best chances of success, 2) the
> least cost, and 3) the most favorable access to transportation and
> marketing. This is not a political decsion, it is an economic one.

Jul 19 08:55 AM

[Ferdinand E...:]

Everyone that I have talked to through the years says that more drilling will not provide what the 'drill baby drill' people think that it will provide. I hope that the decision makers understand that, and understand it perfectly.

Jul 19 09:46 AM

[Jimbo:]

I have concluded that government decision makers and their influential NGOs are keeping their foot on the oxygen line to domestic drilling in order to force the economy into alternative fuels. Unfortunately, the technical and logistical issues are pushing any meaningful alternative sources of energy far down the road, possibly decades down the road. In the meantime we export declining dollars to sources abroad , some of whom hate our guts. The net result is a debased currency, dependence on hostile sources, and an impaired economy. Way to go gang! Imagine that ANWAR is the size of a page in a newspaper. Due to new techniques of horizontal drilling, the platform needed to drill for and produce oil from ANWAR, would be the size of a mere period on that same newspaper page. I also understand there are close offshore areas in California that might produce oil in a matter of months. But Californians would rather rely on Pixie Dust for transportation fuel. The way this ends is not going to be pleasant..

Jul 19 02:28 PM

[Joe H.:]

Keep in mind all the political B.S. when the next election comes around!

Jul 19 05:30 PM

[Gadz:]

I totally agree Jimbo, oil has always been a nasty blend of politics and economics. And never will it be any different. Even solar and wind have their own political agendas, especially when you run into the NIMBY crowd where wind turbines are concerned. I am long oil, the price is only going one way.

Jul 20 11:00 AM