Oil Traders Bullish; Analysts Aren't

By Brad Zigler Real-time Monetary Inflation (last 12 months): 2.6%*

This is shaping up to be another contrary week, as sell-side analysts' guesstimates of oil supplies square off against traders' bullish sentiments. Boosted by a weakening dollar, November crude oil surged overnight to a 2009 high of $75.17 a barrel after being lifted 1.3 percent in daylight trading Tuesday. Both gasoline and heating oil ticked higher—1.8 percent and 1.6 percent, respectively—on the day. Tuesday was the capstone for a week in which the bulls took control of the range-bound crude market. Oil posted a 4.6 percent gain for the week, bettering gasoline's 3.8 percent increase. With prices up 5.8 percent, heating oil was the week's standout. NYMEX Nearby Crude Oil Despite the bullish tone taken by traders, analysts are predicting tomorrow's holiday-delayed Energy Department inventory report will show domestic crude oil stocks building by 700,000 to 1.1 million barrels and gasoline stockpiles rising by a million barrels. Crude oil stocks have sunk by more than 38 million barrels, or 10 percent, since May. In that time, the oil market's contango, or back-month premium, has shrunk nearly two-thirds. Domestic Oil Inventories Vs. NYMEX Futures Curve This week, in fact, featured a one-day break in the three-month futures roll below a dollar a barrel. The roll averaged $1.57 a barrel, up from last week's mean of $1.13. Premiums for lighter, sweeter crude grades shrank as refining mixes continued to favor heavier distillates. West Texas Intermediate, on average, commanded a barrel price only $2.19 better than North Sea Brent. Last week, the premium averaged $3.75 a barrel. Emphasis on refining heavier distillates improved overall margins by as much as 1 percent. At current prices, a 3-2-1 refinery run (three barrels of crude producing two barrels of gasoline and one barrel of heating oil) yields a margin of 6.6 percent; running a 2-1-1 operation (two barrels of crude yielding one barrel, each, of gasoline and crude oil) cranks out a 7.6 percent gross profit. Margins are, however, near seasonal lows. The 12-month average for 3-2-1 operations is 17 percent. NYMEX-Implied Refining Margins Technically, crude oil is strengthening. Both MACD and RSI are moving northward, signaling a greater probability of higher prices (details on these indicators can be found in "The Gold Market's Tech Clues." Bulls have their eyes set on the August high of $75.89 as the next upside target. A breach of last Thursday's low at $69.17 would likely dispel near-term bullish notions. *Note: The monetary inflation rate is calculated daily and represents the change in our proprietary index from this date one year ago. We update long-term inflation in real time as well. Since 1999, the compound annual growth rate in our index is 5.2 percent.

Comments

[Ferdinand E...:]

This is an interesting article, and pedagogically valuable. I can understand why analysts are not bullish though. In the light of the international macroeconomy, the price of oil is too high

Oct 15 10:46 AM

[yank:]

No it isn't. We all have to come to grips with the fact that the "easy oil" is long gone. Gone too are the "good old days" of $20 oil. The "inflation" in operating costs for explorwers and drillers require a floor of $70 oil to be economically viable. When prices dip and remain below that threshold projects are either delayed or cancelled. I almost "lost my lunch" last week when Rex Tillerson (Exxon CEO) said oil demand would remain at depressed levels for 20 years. Now Rex is ordinarily one smart guy but he must have taken one too many puffs on the "bong". For oil demand to stay at these levels one of two things MUST happen:

1. At least a decade long global depression must occur.
2. Population growth rates in the "emerging markets" must either reverse or flatten out.

Sorry, I just don't see either of those things happening. I guess my main point is that demand will recover, OPEC will continue to restrain production to support prices, and Non-OPEC production will continue to lag.

Just my assessment as an investment advisor. I would go with the oil traders before the analysts any day. I don't think these analysts "know where their dick is."

Yank


On Oct 15 10:46 AM Ferdinand E. Banks wrote:

> This is an interesting article, and pedagogically valuable. I can
> understand why analysts are not bullish though. In the light of the
> international macroeconomy, the price of oil is too high

Oct 16 11:28 AM

[Hmm?!:]

The big misconception is that peak oil means running out now.....it does not. It means CONVENTIONAL oil output has likely reached its peak and will begin decay.

However South African Sassoil can make oil from coal for as little as $35 a barrel, and China, the US and even India have a hell of a lot of coal laying around.

Future Canadian Oil Sands production was going to be as high $80 a barrel to break even. But with the crash all the construction contracts were renegotiated....... not sure where it is at now. Most of the existing production is in the $40 - $50 or less range.

And lastly if oil prices jump high enough, just about every dry oil hole in the planet will start getting steam or something else pumped into it.

Until we reach peak oil production, can there be viable economic alternatives??

Oct 17 01:27 AM