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Rumor driven oil market! After a tight day of trading, oil spiked in the afterhours market, reaching as high as $68 on rumors of a skirmish between U.S. and Iranian forces. Fortunately it was the white collar types on the trading floor with the itchy trigger finger, and not anyone actually holding a gun over there.

The U.S. military and State Department officials said they had no information about a naval incident between Iran and the U.S. Rumors that Britain had staged a rescue attempt were also found to be unfounded. However helping to keep the conflict premium in prices, the U.S. Navy yesterday started the largest show of force in the Gulf since the 2003 invasion of Iraq, the Associated Press reported.

Oil is looking to open up $1.76 this morning, and will likely reach $65 and higher during the day. This will be short-lived unless something actually happens, and I’m more inclined to add to put positions. I’ll take a few opportunistic long trades this morning, but it will be in comments after I see how the market opens (only once the initial surge is out of the way).

Inventory Expectations (from Reuters) (not sure how much inventories are going to matter on a day like today):

  • Crude -- up 1.6 million barrels. Probably the most important number of the three right now. If oil imports keep rising, it will put the kibosh on any credibility OPEC might have had. When the Iran thing blows over, if imports are actually higher than they were last fall, crude will come in quickly.
  • Gasoline -- down 1.8 million barrels. Watching the demand numbers here, which are up, but not as much as the talking heads would have you believe. I’ll review that tomorrow, but suffice it to say that we’re not short of gasoline inventories for this time of year, and a rising utilization (see the Snafu page for more of El D’s great finds) will right this ship in time for stronger demand later this spring.
  • Distillate -- down 1.2 million barrels.

Natural gas is up with oil. Very resilient and likely to trade higher with oil, although what logic applies there I’m not sure outside of “a rising tide lifts all boats.” The April contract was strong all day yesterday closing up $0.25 to $7.50.

Potential Longs -- these are stocks I have queued up for a trade if I think the rally is sustainable or at least worth a quick trade: Apache Corp. (NYSE:APA), Baker Hughes Inc. (NYSE:BHI), EOG Resources Inc. (NYSE:EOG) (still trades with oil more than gas), Suncor Energy Inc. (NYSE:SU) [see below], Valero Energy Corp. (NYSE:VLO), Tesoro Corp. (NYSE:TSO), Energy Select Sector SPDR ETF (NYSEARCA:XLE), and ExxonMobil Corp. (NYSE:XOM). You can make money being long anything energy on a morning like this one, but these names are highly volatile and trade closer to oil than most. Note that if the initial surge fails, the same list works equally well (except perhaps for XOM) on the downside.

Analyst Watch: Suncor Energy Inc. (SU) from hold to Buy at Deutsch (if you’re looking for a quick long trade this morning this is one to watch -- few benefit more from higher oil than the oil sands players. Stone Energy Corp. (NYSE:SGY) from hold to strong sell at Matrxi (ouch).

Nigeria Master Plan Watch: President for now Obasanjo launches Master Plan Niger Development socio-economic development in an effort to ease widespread discontent:

"As we launch the master plan today, it is my abiding belief that we are also launching the commencement of a voyage of hope that will sail the Niger Delta past a legacy of turbulence, neglect and poverty into an assured future as our nation’s most peaceful, most prosperous and most ecologically regenerative region."

Comment: Words. He leaves office in April, he’s been in charge since 1999, and he does this now. Also, I don’t see any actual details yet but it is a 15 year plan, so I’m not holding my breath. I’d expect increased violence leading up to the elections.

Bastardi Watch: He predicted the late winter cold snap and now he sees a mess ‘o hurricanes in the Gulf.

BE CAREFUL OUT THERE TODAY. Take oil prices with a grain of salt. (I almost didn’t post anything but that today, because the market will be moving very fast and it has little to do with fundamentals.)

Even if there is a conflict, you’d have to sink something in Hormuz or see a blockade to impact the fundamentals, and I don’t think that’s very likely. Mahmoud’s economy is based on oil, and he, like his buddy Chavez in Venezuela use oil dollars to keep themselves in power with frivolous social program (cheap gasoline etc.) while neglecting their infrastructure. Those guys can’t afford to stop the flow of oil or they’ll be swinging like Mussolini.

Source: Energy Stock Trader: Wednesday Outlook