Crude Oil, Bull or Bear?
Research for Online Investors

by John Dalt

7/17/09

The Energy Information Administration (EIA) report on petroleum comes out every week.  We cover this report, to help us understand what is happening in the market.  This week saw crude oil dip in price then turn higher today.  Why?  There were general concerns about the economic recovery, the market was trading lower and the dollar was up relative to other currencies.  But, inventories are down.  Since May 1, the crude oil inventory has been down every week except one.

Does this mean oil is going to go higher?  The trend is clear in inventory.  Oil traders are looking at demand.  The inventories in gasoline and distillates (diesel fuel, jet fuel, kerosene) have been increasing.

This is indicative of an economy that is not recovering.  Consumers are not driving as much, hence gasoline demand is down.  More importantly, goods are not being shipped.  Truckers and trains are the largest users of diesel fuel.  Rails and trucking companies have been removing capacity from the system due to lack of demand.  Burlington Northern (BNI) reports freight volume decreased by more than 20% in the second quarter.

The consumer is not flying as airlines report lower passenger counts.  United Airlines (UAUA) reported a 7.5% decrease in revenue passenger miles in June compared with last year.

Can we have a recovery without an increase in shipping?  No.  Our economy is increasingly reliant on electronic means of delivery, information passes at the speed of light.  However, raw materials, capital goods, food, consumer goods all have to be moved from their production to the consumer.

Will oil get cheaper until the economy recovers and shipping increases, which increases usage of fuel?  Maybe.  The futures market looks to the future, discounted by the carrying costs until the contract delivery date.  The market must also look at supply.

OPEC has set production quotas for members.  Exploration for new supplies has been severely curtailed because of low prices and regulatory uncertainty.  Would you spend money looking for oil or gas with congress threatening tax changes and punitive cap and trade legislation?  Mean while production from existing wells declines each year making us more dependent on imports.

According to the EIA, crude oil inventory declined by 2.8 million barrels last week.  You can consider the increase in gasoline (1.5 million barrels) and distillates (600,000 barrels) inventories of if you like, but we still end with 700,000 barrels less than we had when we started the week.

The U.S. inventory of crude oil has declined by more than 30 million barrels in the last two months.  If this trend continues, by September our inventory will be below the average range for crude oil stocks and approaching 2008’s days of supply. By December 2009, we will be below both. The two charts below graphically depict our oil stocks and days of supply.

I have, and continue to call oil “the trade of the year”.

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Last year I signed up on the American Solutions website in support of the “Drill Here, Drill Now” campaign.  You may recall that President Bush lifted the executive ban on offshore drilling.  The regulatory process requires a comment period, before decisions can be made on where to lease and drill.  Guess what?  The Interior Department does not have an email address for public comment.  That is one way to limit input that they really do not want to hear.  You can visit the Interior Department or American Solutions, investigate for yourself.

“Experience is that marvelous thing that enables you to recognize a mistake when you make it again.”
----Franklin P. Jones

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The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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