Monday, August 11, 2008
Close, Very Close
The Oil market is close to a bottom, UNLESS the U.S. releases Oil from the Strategic Petroleum Reserve - or threatens/promises to. Short term bottom or long term bottom remains to be seen, but my bet is Oil does not break $107, and when the rally comes Oil could move $15 in 1 week, and $25 in a month. August is a notoriously difficult month to be long Oil, and this year is proving to be no exception. But winter is coming, it has not been called off. The refiners MUST buy crude now in attempt to beef up stocks of heating oil and other distillates, and in fact distillate inventories are about 6 million barrels ahead of last year, while gasoline is 6 million behind, and crude about 43 million behind.
So why was the sell off so bad? I dunno, why was the rally so good (if you were long, that is)?
Let us get back to the numbers. With gasoline so expensive, why do we have less in inventory than last year? If their was in fact demand destruction, shouldn't this stuff be piling up? And what is up with the doubling of "Blending Components" over the past 4 years? " Blending components" means, for the most part, ethanol. Ethanol was not part of "Total crude and petroleum products" 4 years ago (just click the data range to the right of the table). So the 5o to 60 million barrel increase in blending components is ALL ethanol. Shouldn't we subtract that amount from the Total (988,327,000 - 60,000,000 = 928,327,000) in order to compare apples to apples? And since most cars cannot use E85 all that ethanol is illusory in terms of petroleum inventories. I can't find a first week of August from 1990 to present that has fewer barrels in inventory.
"On the other hand" Oil might not be at a bottom with the potential of an Obama victory. A President Obama would most certainly follow through on his campaign promise to release 50mm barrels from the Strategic Petroleum Reserve. This is a "one off" event but must be taken into consideration. Of course, OPEC WILL ABSOLUTELY respond and take that 50mm off the market over time. Aside from being the DUMBEST idea since the Edsel, from an environmental (those 50 mm will wind up in the atmosphere), economic (this is a patch, not a solution, and only stretches the rubber band that much further), and national security (the SPR was designed for supply interruptions, not high prices and political payoffs) point of view, I have NO DOUBT Obama would carry through with that particular promise.
As you can see, there are a lot of moving parts here.
So, until the end of the sell off in Oil, the commodity markets are going to be too treacherous a place to participate in. And we won't know where oil bottoms with the threat of government intervention in the markets, futile though it might be.
Still, in the end it is all about Oil imports. They either rise, or they decline - as they have for well over 1 year. No point in being a hero. All will be revealed in due time, and somewhere in there I am going long Oil into the U.S. Great Oil Import Crisis of 2010 - 2012.
Mentatt (at) yahoo (d0t) com
Posted by The Short Story Man at 12:38 PM