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By Staff on Mar 14, 2010 with 2 responses

Five Reports, One Conclusion – Oil’s Going Up

By Adam Lass, Editor, WaveStrength Options Weekly

This is probably your last chance to buy into oil before it starts to plunder the economy again.

Five of the many reports cluttering up my desk this morning claim to be pertinent to the price of gas this summer.

As regular readers may recall, I track these things closely for two reasons. First, there is the effect gas prices have on the economy. Inflation may be the disease, but gasoline is one of that disease’s chief vectors, the agent that carries it deep into our economic body – and our wallet.

The second reason I track oil and gas is to make as much profit off the damn stuff as I possibly can. Just think of it as getting a little of our own back.

Red Sky in the Morning?

The first report comes to us from AccuWeather’s Joe Bastardi, who apprises us that his outfit’s slide-rule types are looking for the Atlantic and Gulf of Mexico to enjoy an unusually active hurricane season this year, both in terms of quantity and ferocity of storms.

In 2009, we saw the weakest season in a decade, nine named storms that never actually came on shore here in the U.S. In 2010 we are told to expect an above-average season, some 16 to 18 storms with at least two or three gob-smacking the homeland.

They credit this to “a weakening El Niño in the Pacific.” Apparently, this cyclic Pacific warming cycle protected us last year, and may fail to do so this year.

Or Not

Meteorology may very well be the oldest true science (I’ve always had a hunch that some of those scratch marks on the Lascaux cave walls were simply counting how many damn days in a row it had rained). But it still has a hard time with stuff like whether or not we will get three inches or three feet of snow here at Seven Oaks Farm.

Still, Colorado State University’s Tropical Meteorology Project has also called for 16 named storms, WSI is calling for 13 storms, with eight slated to hit Category 3 or higher on the Safir-Simpson Scale, Commodity Weather Group is calling 11 storms all told with five hitting hurricane strength, and most in the trade suspect that the May report out of the Fed’s Climate Prediction Center will fall in line as well.

This whole guessing game is germane to energy prices in that some 27% of our crude oil and 15% of our natural gas come out of the very shallow Gulf of Mexico. Should any of these storms rip through the Gulf, we could expect to see said supplies cut off with an attendant price increase. Heck, just the treat of same is enough to start a speculative frenzy in downtown New York.

China Wants Your Gasoline

Next up, we have a slightly more concrete issue brewing in China. It seems that the world’s fastest-growing economy has passed a critical threshold in February, when its demand exceeded internal supply, and it became a net importer of oil and associated product.

If these numbers are to be trusted (and that is always an issue when dealing with Beijing – and Washington too for that matter!), it appears that Chinese demand is up 58% year over year, with China purchasing some 1.8 million more barrels a day.

Now even here we see some rather odd caveats: JPMorgan Chase’s Brynjar Eirik Bustnes claims that some of this may be linked to low refinery utilization during the month of the Lunar New Year.

Still, one can easily imagine how this too is whetting speculators’ appetites.

OPEC Upgrades Demand – Again

Again we go to the pile on my desk, and find that OPEC is expecting to pump 880,000 more barrels per day (roughly 1.04%) this year than it did in 2009, if it has any hope at all in keeping up with burgeoning demand from both China and recovering Western economies.

The caveat here? This current call has been upgraded by some 80,000 barrels over last month’s prediction, and may yet be upgraded again in a similar manner. OPEC’s most recent statement warns that “questions remain as to how long governments will be able to support their economies.”

Which brings to the furor brewing in Washington over the Fed’s commitment to an “extended period of low rates.” It seems that a vocal minority of voting board governors feel that this pledge is boxing them in a bit.

Talk, Talk, Talk

They don’t actually want to change rates, mind you. When pressed, they concede that “the U.S. jobs market remains weak, with unemployment rate near 10% and job openings scarce.” But they would like that “extended period” phrase that was used in the last four FOMC reports changed to “some time” in the next statement. This way, investors will understand that the Fed will “not refrain from raising rates well beyond what is prudent.”

And we believe them, because the Fed has such a strong track record of fiscal prudence, right?

Your Nightmare Is a Speculator’s Dream Come True

Let’s string the dots together one more time: flood of cheap dollars (and yes, they will start getting cheaper again, now that that whole euro funk is passing) chases limited supply of oil… oil goes up… everything that travels by truck train or plane gets more expensive… inflation!

Oh, and here’s one last item of the heap: It seems that the supply of oil stateside is declining substantially faster than “the experts” were expecting. The call was for pretty much no change this week, with an even balance between imports into the plenums and use by refiners. Instead we see a 2.96 million barrel drop in the plenums.

This shortfall delighted the aforementioned speculators, who responded by jacking July crude futures to $84/bbl.

There is only one minor difference between my prediction for the economy and some of my dour compadrés’: they are calling for a double-dip recession to take down oil. I figure that oil will take the economy down into the next recession.

Both ideas stink. But mine offers a shot at some cool gains along the way.


This article was republished with permission from Taipan Publishing Group.

  1. By CEA on March 15, 2010 at 10:23 am

    Will the world run out of oil? The answer is no. Here are some reasons why:

    1. History – Estimates of world oil reserves have generally trended upward. According to Oil & Gas Journal in January 2006, proven world oil reserves were 15 billion barrels more than estimates.

    2. Undiscovered reserves – The largest increase in proven oil estimates was made in Iran. Iranian oil reserves increased by 5 percent from 125.8 billion barrels in 2005 to 132.5 billion barrels in 2006.  Saudi Arabia also reported an increase of 2 percent, or 4.9 billion barrels.

    3. New technology – Development of new technology increases the possibility of reaching previously “unreachable” reserves.

    4. Crude oil price – When the price of crude oil increases, more costly energy resources become cheaper, which may provide an incentive to start production of alternative resources (e.g. wind, solar). However, it must be noted that alternative energy (solar, wind, geothermal, etc.) is currently not able to directly replace high energy density liquid petroleum for transportation use. 
    Domestic energy production is key to the economic fruition of America. Instead of spending our wealth abroad for foreign resources, we have a chance to strengthen America’s energy portfolio with our own.Want to learn more about balanced energy for America? Visit http://www.consumerenergyalliance.org to get involved, discover CEA’s mission and sign up for our informative newsletter.

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  2. By Oil Trader on March 15, 2010 at 10:25 am

    Dear Adam

    The weather link is brilliant. I hadn’t included that in my analysis but will now do so.  

    On China I have two comments. Chinese inflation and the impact of subsidy removal on Chinese consumer demand for gasoline.  Do we have any breakdown of what part of the growth in China gasoline demand is consumer driven and what part is industrial. If the Chinese move on inflation (as a large part of the world believes) both demand drivers will ease.  

    Finally within the next 6 – 8 months, irrespective of how much demand rises or grows it can’t eat the 6 million plus barrels of surplus capacity that OPEC is sitting on, on account of earlier production cuts. And this is before the  whole Iraq going from 2 million barrels to 12 million barrels in the next 5 year debate. 

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