Options Trader Thursday Outlook

We did our long-term portfolio review and it turns out I’m still bullish.

Last week I decided we were at a bottom and I haven’t really seen anything in this awful week to change my mind.  We pretty much held my levels yesterday and if we hold them through the Fed on Tuesday, I think the market will be set up for a nice move, regardless of what Bernanke actually says.

Of course it all depends on oil, but how long can they keep this charade going when the headline in the USA today is "Drivers Cut Back by 30 Billion Miles in Six Months"?  That’s right, between November and April of this year, drivers drove 30Bn fewer miles than the year before.  This is the biggest drop since the last time oil spiked to an inflation-adjusted $100 (Iran hostage crisis 1979) and that led to a decade of demand destruction that dropped the price of oil 80%.  Even if you assume that every car got 30 mpg, that’s still 1Bn gallons or about 24M barrels of oil, roughly 1Mb a week less over the period measured. 

Evidence of demand destruction is everywhere and even the EIA is confused as to how refinery utilization can be running 10% below average (86.1 vs. 94.1), indicating very low demand, while product prices remain so high.  In fact, refiners have been selling gasoline at a loss at several points this quarter as the actual demand for gasoline is far below the rise in crude prices that the refiners have to pay.  Crude oil imports are down 500,000 barrels a day from this time last year - that’s a 3.5Mb draw that is being "spotted" on the inventory report EVERY SINGLE WEEK and still they have builds!

Gasoline imports are also off over 100,000 barrels a day, another 700,000 barrels that are spotted on the inventory report.  Despite this tremendous shortfall in imports, our total petroleum stocks in the US stand at 1,674Mb, down just 48Mb from last year, when oil was $65 a barrel.  So they shipped us 600,000 barrels a day less for a year - that’s 219Mb yet our stocks dropped just 48Mb. 

That means we must be using  (and I’ll do this math step by step so CNBC announcers can understand it) 171 Million barrels less fuel than last year.  That’s 3.3M barrels a week less consumption or 5% demand destruction in just one year!  Imagine what will happen when we get an adminstration that actually promotes conservation. ...

Could it be possible that paying an extra $40Bn a month for less oil than we consumed last year is somewhat damaging the economy?  Why do so few people talk about this?  We get NOTHING for our $40Bn and those dollars (about $500Bn a year) get shipped right out of the country, flooding the world with dollars and debasing our currency.  This is a national emergency that will not be solved by "drilling more oil."

I’m trying not to be too political during the week, but when one candidate is offering solutions to the problem and the other candidate IS TOTALLY WRONG, it’s hard to stay objective…

Asia decided that yesterday’s rally was totally wrong and completely reversed it this morning with 2.25% drops on both the Hang Seng and the Nikkei, who followed the Shanghai off their 7.3% cliff.  When your index is at 315 and falls 23 points in one day - that is generally cause for concern (kind of like the SOX!).  China’s inflation forecast was bumped up to 7% from 4.6%, prompting fears that the BOC will tighten again.

Several airlines and brokerages hit the limit-down 10% mark during trading, so a poor showing in the US with oil remaining over $132.50 means there is very likely more to come in tomorrow’s trading.  Over on the Hang Seng, only 1 of 43 components of the index closed positive.  In Japan, Toyota (TM) and Sony (SNE) both took hits as the dollar weakened once again.

Europe is holding flat ahead of our open despite UK retail sales coming in much better than expected.  Could it be possible that the consumer is "not dead yet"?  If so, that will be quite a shocker to the bears.  Unfortunately the commodity sector is holding up the markets this morning as a Nigerian rebel attack (it must be the day before contract expiration, then) shut down a Shell (RDS.A) facility which is 75 miles offshore and could spot a ship coming to attack them from about 5 miles away even if they didn’t bother to install about $1,000 worth of radar equipment which would let them see craft from about 20 miles from which a $20/hr security guard with the most rudimentary of weapons could have sunk the boat before it attacked the Billion dollar platform and shut down $20M a day of production…  WHAT A FARCE!

Speaking of farces, Hank Paulson, the fox that guards the hen house, is calling for greater oversight of the financial markets by giving more power to the Fed (because they’ve been doing such a good job I guess).   Jobless claims were down but it didn’t seem to do anything for our markets, so we’ll have to continue to watch and wait once again and see how the market holds up for the day.

Be careful out there.

Comments

[Eric in IL]

Can someone weigh in on the oil consumption from our armed forces. Are they using more or less? Without the pro/con of our military decisions, I see the military efforts adding huge demand for oil since 9/11. Anyone care to address this issue?
Also, what is the increase year over year from the BRIC nations? I would like to see the global oil demand picture explained year over year.

[dick streich]

So why is the author against drilling for oil in this country. He talks about price, utilization & inventories, but offers no clues as to why oil is still so expensive. Instead of being critical, offer solutions.It's
clear that Mr.Davis is a democrat & will only support the canidates position on oil etc.

[LF]

How come we never hear how much the price of gas can be lowered but still have the big oil companies make a DECENT (hundreds of millions) profit instead of a KILLING (Hundreds of Billions)!!

[O Trader]

In my opinion, the main reason for the high crude oil price is that China is buying. They rather keep the oil than the devaluating dollar.

[LF]

Anyone know why the following is not a good idea? Build desalinization plants all along our coasts, devote a large portion of our technological resources to hydrogen technology and drive hydrogen powered vehicles. The earth is 3/4 covered in water. No supply and demand issue there!

[User 22715]

I too believe China's demand for oil has been keeping oil prices elevated as well as other commodities. Their double digit growth rate has had the assistance of the governments subsidy to keep gas prices low. Inflation has come to China as a result of the rising costs of other commodities and labor costs. In an unusual effort to curb its inflationary growth, the Chinese government has opted to pull back some of the subsidy it has provided resulting in an 18% rise in the price of gasoline in China.
There are alot of details to cover but generally, as the worlds largest consumer of oil and our low status as producer of oil, and a steady global increase in demand for oil, makes us subject to the whims of the world; like attacks on pipelines and oil rigs, etc. And though it sounds like an old song at this point, the sooner we reduce our dependance on foreign oil, the less subject we are to price spikes in oil and gasoline. I think in the short term more drilling at home is needed immediately, but over the longer term a transition to alternative methods is needed, such as hydrogen. But this sounds alot like the dual mandate of the fed. Which way should we go? Which way do we go?

[Pocopanda]

Oil is all about supply versus demand.

It would appear that we as consumers are not feeling enough pain yet with the rising gasoline prices.

Everywhere I look, I see big gas guzzlers on the roads. They include pickup trucks, SUV's, and Vans everywhere.

On TV the vehicle manufactureres continue to push horsepower rather than miles per gallon.

It also must be polictically correct to deny drilling for oil in our own part of the world.

The explanation is that it would take too many years to develop and bring the oil into production.

Unfortunately, if this logic is followed, ten years from now our problem will only be greater.

The solutions as I see it are:

1. The U.S. vehicle manufacturers should make cars that use less gas per mile. Forget the horsepower frenzy.

2. The push for hybrid vehicles must increase dramatically.

3. The push for alternate fuels must increase dramatically.

4. We must find and develop further oil reserves in our own backyard now.

We risk being held at ranson by other governments that control oil.