Options Trader: Thursday Wrapup

by: Philip Davis

“For the moment, supply (of oil/gas) isn’t extremely tight.”

That’s a direct quote from Liz Clayman on CNBC at 11:42.

This is the spin they put on an inventory report that showed a 3.15Mb build in crude (vs. expected 200Kb draw) and a 1.8Mb build in gasoline and a 1.16MB build in distillates. That’s over 6Mb of crude products that we don’t actually need in just one week - where is the shortage? Where is the "record" demand?

This is AFTER OPEC cut 1.7Mb per day of crude from global production, which means they have a capacity surplus of at least 1.7Mb per day. Meanwhile, we have a demand deficit of close to 1Mb per day. This is not a US aberratio;, total oil inventories in the EU have reached a historic high and now stand at 66Mb above the 5-year average. "These large uncertainties surrounding world oil demand, non-OPEC supply and the demand for OPEC oil pose a considerable challenge to the market. Nevertheless, with the current high stock levels and OPEC spare production capacity reaching around 15% in the second half of 2007, a sufficient cushion of supply is available to cope with any upward risk to the forecast," said OPEC.

This is long-term demand destruction in action and recent auto sales indicate that the pattern is accelerating as the US consumers are ignoring the government’s timetable and boosting their own fuel economy by 10 mpg by switching to more fuel-efficient vehicles.

World Oil Surplus Production Capacity

Is this the beginning of the end for the energy cartel? Or can we simply expect more Nigerian kidnappings and the return of the "Iranian nuclear threat" along with the usual hurricane hysteria and refinery fires of the week to maintain prices at record levels for a product we clearly have a glut of.

I must apologize to the Valero Energy Corp. (NYSE:VLO) as I incorrectly stated this morning that they shut their Flint Hills refinery when, in fact it was Koch Industries that owned the hydro-cracking unit that was shut down. It turns out that VLO only reported a "flaring of chemicals" at their 340Kbd Corpus Christi refinery but this had no impact on operations yet strangely it got included in this Bloomberg article as one of the reasons oil was trading near a 10-month high.

Coffeyville’s plant has been shut down due to flooding since July 1, bringing the total US refining capacity to a level that is 700,000 barrels a day or 4.9Mb per week below last year’s level at this time. So they are making 4.9Mb less, and the country is still getting a build in gasoline stocks of 1.8Mb for the week yet we are being billed more than last year - still don’t think you are being ripped off???

Weekly US Retail Gas Prices, Regular Grade

I can virtually guarantee you that something will blow up this weekend, someone in Nigeria will be kidnapped, perhaps a pipeline will be shut down, all to maintain the absolutely ridiculous climate of fear and terror that is necessary to keep you from questioning the true value of the energy we consume. I won’t get into it here, but we had a spirited debate on SeekingAlpha, where I was forced to point out just how ridiculous the excess profits of the oil companies have now become yet we accept the fact that 1/3 of all corporate profits in this country are energy profits, even as they suck the life out of the rest of the economy.


In other news, the markets finished pretty flat and dull with the Nasdaq leading a spectacular mid-day recovery, led by Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), who posted great gains for the day. We did not get very good movement from the Russell, but it did finish up 2 so we maintain our bullish but VERY cautious stance until proven otherwise. Transports were up, led by the Sheet Steel Company (XAL), which gained a point on the oil news. The NYMEX, however, managed to pound crude back near $72 at the close and I maintain that $75 oil will not occupy the same space as Dow 13,500 this summer.

US Markets

As I mentioned on Monday, we will not benefit from a continuation of a very narrow Nasdaq rally - we need to see broader indicators kick in and the Russell is going to be our leading indicator, so we will see how they handle the 850 mark with tomorrow’s critical jobs data hitting the street at 8:30 and, more importantly, next week’s earnings.

Commodities rallied despite a $5 drop in gold, back to $650 and the dollar took a mild bounce and held 81.50 (talk about low expectations!).

Oil and Dollar