The refiners are still holding on to massive 1Q gains. I also talked extensively last week about the joy ride the refiners have been on this year, which in some cases (Tesoro Corp. (NYSE:TSO) and Western Refining Inc. (NYSE:WNR)) seemed to overshoot the $0.40 rally gasoline has enjoyed since mid-January. Despite a little end-of-week profit-taking, the refiners’ buoyancy continues unimpeded. I think this is one of those parabolic rallies that will end in a pretty extreme correction.
Right now the group is on fire (pun intended), but as the we move into spring and more refineries come back on line I’d look for a pretty good snap back here. So far I continue to be wrong, and am looking at longer dated puts (May) to play this.
Crude had a wild ride on Friday, plummeting in quadruple witching induced trading to as low as $56.17 before a late session rally pushed the April contract back over the $57 mark. Anything below $58 would have been (and ultimately was) deemed a failure. April crude is back below $57 in pre market trading.
Next stop $55, and then watch your puts because we’re likely to get a pretty strong bounce.
Beyond that and crude’s direction gets a little more difficult to predict.
- I think OPEC is pretty happy with Nymex trading between $55 and $65, their new unspoken price band. Below that and they dust off the sabre rattling rhetoric.
- It also depends heavily on the three legs of the gasoline price stool (I know I’ve gone into this ad nauseum in recent weeks, but the beginning of the decline in gasoline prices I’ve been looking for was the event that chop blocked oil last week).
Gasoline imports rose briefly last week, but that needs to continue for RBOB, and thereby oil, to weaken much below $55.
Refinery utilization needs to get off the floor. That will happen in the next two to four weeks, barring no new snafus.
High retail prices need to put the breaks on gasoline demand. So far that hasn’t happened.
Canadian oil imports continue to rise, hit record in January: I’d point out that Canada accounts for nearly 20% of U.S. imports (nearly half of OPEC’s current total coming to the U.S.), and production there is growing slowly and has set several records in recent months. Something to keep in mind when the press beats the drum on declining production elsewhere.
Mexico is up 190,000 bopd in January, but still at its second lowest level in the past year. This is pretty important and the one month rebound does not a recovery make:
- Cantarell -- Production at Mexico’s largest field, the Cantarell offshore complex dropped by 12% in 2006, and a 15% decline is expected this year.
- Pemex just reported another paltry year for reserve replacement (41%), due to a combination of usuriously high taxes which leave little for reinvestment and a prohibition on foreign investment.
- Bloomberg reports that Pemex reserves have fallen by half since 2002.
- The Mexican congress rejected calls for opening the industry to foreign investment last year.
Comment: They won’t be the third largest importer of oil to the US for long.
Natural Gas: Gas weighted heating degree days fell 40% for the week ended March from the prior week, and we should get the first non-triple-digit withdrawal in the last nine weeks this Thursday. Last Monday I said:
- On Tuesday April gas fell through $7 and spent most of the week hovering a dime below $7. Gas is off slightly in the pre-market session this morning.
- As I said last week, next stop $6.50. And then $6. After that I think we trade sideways for a time (maybe $5.75 to $6.50). I’m getting my buy list ready for mid to late April.
Analyst Watch: OMI Corp. (OMM) downgraded to hold at Jefferies after the company announced it was looking at strategic alternatives on Friday and jumped 13%. I’ll be taking another look at the tankers, with an eye towards longs in Teekay Shipping Corp. (NYSE:TK) and Tsakos Energy Navigation Ltd (NYSE:TNP) if they come in a bit.
CFTC: Not much change. Natural gas Commitments of Traders report for last week showed there wasn’t much change from the prior week. Both the longs and shorts fell about 1,000 contracts, and the net short position remains about 20,000 short.