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Alaron's Two Week, $5 Oil Surge Countdown Watch Day 1: Yesterday on CNBC, Phil Flynn of Alaron Trading espoused price targets of about $68 for oil (yesterday's price at the time of the interview + $5) and $4 retail for gasoline. He originally said $4 average retail gasoline, but quickly hedged his bet by adding "somewhere in the U.S."

His reasoning in a nut shell: WTI [West Texas Intermediate], which usually trades at a $2 premium to Brent, is now at a $3 discount to Brent. His assumption is that this will reverse as refiners increase utilization and bid up crude prices.

One thing going in Phil's favor: The May contract expires Friday, so he gets an automatic bump of $2 there as we switch to June! Tricky devil.

O'Grady from A.G. Edwards was the counterpoint analyst who is a very conservative guy. He stifled a laugh at the reasoning, and said he didn't see that happening. He also pointed out that if Brent fell, it would also serve to re-establish the relationship.

Anyway, I love a good (and pointless) challenge. I'm betting June crude will be closer to the $62.50 to $64 range on May 1.

Sentiment Watch: I thought I'd do this at least a couple of times a week for those of you who aren't daily readers.

  • Bearish on the refiners -- sure they'll have a good quarter, but they've had a monster rally and I expect crack spreads to peak sooner than is typical.
  • Bearish on the mini majors -- Murphy Oil Corp. (NYSE:MUR), Hess Corp. (NYSE:HES), Marathon Oil Corp. (NYSE:MRO).
  • Neutral on E&P but bullish on several of the gassier names.
  • Neutral on drillers and service.
  • Bullish on tankers: Teekay Shipping Corp. (NYSE:TK). Although they bought half of OMI Corp. (OMM) last night so expect a little weakness early today.
  • Bullish after a bit of seasonal weakness on the gas names in yesterday's post plus Petroquest Energy Inc. (NYSE:PQ). Favorite pick for now remains Newfield Exploration Co. (NYSE:NFX).

Oil did an about face yesterday as the Enbridge pipeline leak turned out to be a non-event. May crude hit a high of $64.65 in the morning before news came out around noon that the pipeline could be returned to service later in the day. Crude closed down near the low of the day at $63.08, off $0.53. Oil is likely to continue to key off the gasoline market in coming weeks.

Inventory Report Expectations (Dow Jones Survey)

Crude: Up 0.5 million barrels.

Gasoline: Down 1.45 million barrels. Today's number will be key to either rebounding May RBOB towards the $2.20 high seen Friday (I kind of doubt it but it's possible), or making a serious run at $2. Surging demand, an extended maintenance season for the refiners and lower than usual gasoline imports has kept the market tight. I think right now there is more downside than upside risk to gasoline prices.

  • Utilization is rising albeit slowly. I expect utilization to rise to 89% for this past week, and to top 90% in next week's report. The Street is expecting utilization to creep up to 88.8% in today's report.
  • Imports need to hold above 1 mm bgpd. In last week's report gasoline imports again dipped below 1 mm bpd. Gasoline won't be able to make a concerted run on $2 without imports at least regaining the million barrel per day mark.
  • Demand -- at a 4 week average of nearly 9.4 mmbpd, we're running 2.5% above year ago levels. Recent rainy weather could put a bit of a damper on near-term demand however, the consensus opinion is that no price elasticity will come into play until the consumer starts paying $3 per gallon.

Distillate: Down 0.4 million barrels. And no one cares. Just so you know, we're near the high end of the range for distillate storage for the end of winter. Demand has taken a hit of late due to a rainy April in the Farm Belt which has spread out the planting season.

Natural Gas: Near term I still expect a seasonal pullback to the $6.50 to $7.00 range.

Yesterday I commented about natural gas production and gains onshore that have been accomplished with a high rig count. The response wasn't there to offset a long term slide in Gulf of Mexico production. There's nothing like a few charts to better illustrate a point.

Total Lower 48 Gas Production Remains Stalled Despite Onshore Success

Gas Production 18 04 2007

Texas has seen an explosion in the number of gas directed rigs and lately in the number of horizontal gas directed rigs. Two words: Barnett Shale

Texas Shale 18 04 2007

Wyoming has enjoyed a boon of CBM drilling

Wyoming Drilling 18 04 2007

And Other States Volumes Are Rising A Little...

Other States 18 04 2007

...But It Hasn't Been Enough To Offset The Steep Declines Of The Gulf Of Mexico Shelf

Gulf of Mexico 18 04 2007

I realize this is a quick run-through, but I wanted to hit you with a few graphs to cover the majority of the supply problem with pictures. In a nutshell -- we've had next to no growth while employing an ever growing number of rigs. While onshore production is growing, the Gulf of Mexico shelf continues to be a major headache for growing Lower 48 production.

Odds & Ends

Iran Watch: Despite U.N. sanctions, Iran vows to increase nuclear capacity. In yet another effort to wrench the international spotlight off North Korea and having no Brits left to trot out in front of cameras, Iran has once again taking to rattling its atomic sabre. Mahmoud, that is so 2006 of you.

Not Everyone Is Bullish On Gasoline: "I've heard reports that refineries are coming back on line, that U.S. demand has slowed due to the high price (we have yet to hit the peak driving season), etc.," said Darin Newsom, an analyst at DTN.

"Crude oil has no fundamental support, as the underlying supply and demand situation remains bearish as indicated by the wide June to July and July to August futures spreads, Newsom said in e-mailed comments, referring to the price differences between the monthly contracts. I was getting a little lonely.

Analyst Watch: Several service companies cut to hold at Citigroup: Schlumberger Ltd. (NYSE:SLB), Smith International Inc. (SII), National-Oilwell Inc. (NYSE:NOV), Cooper Cameron Corp. (NYSE:CAM), Dresser-Rand Group Inc. (NYSE:DRC), FMC Technologies Inc. (NYSE:FTI).

Source: Energy Stock Trader: Wednesday Outlook