[MrBill]

Sorry, I am off to the ME tonight and in London next week. I will not likely be able to update Trader's Corner until I get back.

Crude jumped today with Brent up above $74 in the August futures month and WTI above $72 per barrel. It looks over-bought, but there seems to still be buying interest ahead of the inventory numbers today. But any moves today or tomorrow are likely to be exagerated as many traders are still off for the July 4th weekend.

Here is an interesting article from yesterday. Take care and see you next week or the week after. Cheers.

$this->bbcode_second_pass_quote('', ' ') Refineries are working around plant
bottlenecks to boost gasoline output as government statistics
show they are running at their lowest rate in 19 years.
They are making more gasoline away from the crude processing
units that usually are key to their production, blending in
ethanol and processing cheaper refined products such as vacuum
gasoil. Crude units at plants including BP Plc's Whiting,
Indiana, facility have been down for months for repair.
``There are a number of ways to make gasoline, and refiners
and others are being as creative as possible to make some, given
the price,'' said Doug MacIntyre, senior oil market analyst with
the Energy Information Administration, the statistics arm of the
U.S. Energy Department in Washington.
The department's refinery utilization data, part of its
closely watched weekly inventory report, has helped push gasoline
prices higher. U.S. refineries operated at 89.4 percent of
capacity in the week ended June 22, according to the latest data.
They averaged 89 percent in the first three weeks of the month.
If that holds for the full month, it would be the lowest rate for
June since 1988.
``Your refining utilization figure, even in comparison to
last year and the five-year average, is tremendously
misleading,'' said Kyle Cooper, director of research at IAF
Advisors in Houston. ``The U.S. refiner is actually doing a
tremendous job of turning the crude feedstock into actual useable
product.''

`Cracking' a Barrel

Almost 95 percent of the crude oil and other feedstock
brought into U.S. refineries in the week ended June 22 came out
as gasoline, diesel, jet fuel or heating oil, an increase of 2.8
percentage points from the five-year average, according to
Bloomberg calculations.
In traditional refining, a barrel of oil is ``cracked'' to
produce both premium ``light'' products such as gasoline, heating
oil, diesel and jet fuel as well as cheaper ``heavy'' products
such as residual fuel oil and asphalt.
Investments in recent years have equipped more refineries
with ``coker'' units that are allowing them to break down a
larger part of a barrel of oil into lighter products than they
ever have before.
``It means you're going to produce less resid and relatively
more gasoline,'' said Tim Evans, an energy analyst with Citigroup
Global Markets Inc. in New York. ``It doesn't magically add total
barrels to the system, but it does help to explain'' the
government statistics.

Gasoline Premium

A refiner can sell gasoline at $25 a barrel over the price
of crude oil, while residual fuel sells at a discount to the raw
material, Evans said.
The hypothetical profit margin, based on market prices, to
refine benchmark West Texas Intermediate crude oil into gasoline
and heating oil for delivery on the Gulf Coast was $16.81 a
barrel yesterday, up 23 percent from a year earlier. It reached a
record $30.29 on May 17.
Gasoline production accounted for about 60 percent of
refinery throughput in the week ended June 22, up from about 52
percent 13 years ago, according to Bloomberg calculations from
U.S. Energy Department figures. Throughput refers to the crude
oil and other raw materials that can be processed in a refinery.
Another reason for the high gasoline output number may be
that refiners are turning some of their heavy refined products
into throughput, processing them again to produce more gasoline.

Unfinished Oils

U.S. Energy Department figures indicate that ``unfinished
oils,'' a rarely cited category in the Energy Department weekly
report, have dropped 9.1 percent since April 13. Unfinished oils
are refined products ``that require further processing,''
according to the agency's online glossary.
Some unfinished oils are included in the department's gross
input and refinery capacity calculations, while many are not.
Those numbers only tabulate what goes through a refinery's crude
units, not what happens in other parts of the refinery or in
terminals, said Michael Conner, survey statistician with the
Energy Information Administration in Washington.
Stepping up the processing of unfinished oils is something
refiners would do ``only when margins are very high,'' MacIntyre
said. ``In theory, they've always been able to do it, but there
hasn't been a need to do it to this degree. This is out of
necessity because so many of the refinery distillation towers are
down.''
Jeff Hazle, technical director at the National Petrochemical
and Refiners Association in Washington, agreed that margins are
motivating refiners to do whatever they can to produce gasoline
right now. ``People at refineries that are running are running
all out.''

[MrBill]

Syria announces that they will stop exporting crude by 2010, which I think is a little misleading. I think they plan to build a refinery with the Chinese and produce refined products such as gasoline instead. Never the less, this is just a small (70.000 bpd) example of oil producers using more energy themselves and exporting less.

$this->bbcode_second_pass_quote('', 'R')TRS-IEA-WORLD OIL DEMAND TO GROW AVERAGE 2.2 PCT PER YEAR FROM 2007-2012, UP FROM PVS FORECAST OF 2 PCT
13:00 09Jul07 RTRS-IEA-STRONGER OIL DEMAND OUTLOOK TO CUT OPEC SPARE OIL PRODUCTION CAPACITY BY 2 MILLION BPD IN 2009
13:00 09Jul07 RTRS-IEA TRIMS FORECAST FOR NON-OPEC OIL SUPPLY BY 800,000 BPD IN 2011
13:00 09Jul07 RTRS-IEA RAISES REQUIREMENT FOR OPEC CRUDE TO 34.7 MBPD IN 2011, UP 1.3 MLN BPD FROM PVS FORECAST


RTRS-IEA sees oil supply crunch looming

World oil demand will rise faster than expected to 2012 while supply lags, the International Energy Agency said on Monday, leading to a tighter market than previously anticipated.
In its Medium-Term Oil Market Report, the adviser to 26
industrialised countries said demand will rise by an average 2.2
percent a year between 2007 and 2012, up from a previous
medium-term forecast of two percent.
The outlook, which updates an IEA forecast last issued in
February, coincides with a jump in oil prices to more than $75 a
barrel, closing in on a record high near $79, on concerns of a
tightening market.
"Despite four years of high oil prices, this report sees
increasing market tightness beyond 2010," the IEA said.
"It is possible that the supply crunch could be deferred --
but not by much."
The IEA's previous Medium-Term report, published in
February, called for world demand growth of two percent a year
between 2006 and 2011.
It now expects global demand to reach 95.8 million barrels
per day from 86.1 million bpd in 2007. The forecast assumes
average global GDP growth of 4.5 percent annually.
The Paris-based IEA also said additional global refining
capacity over the next five years will lag earlier expectations
as rising costs and a shortage of engineers delays construction.
It also said world production of biofuels would reach 1.75
million bpd by 2012, more than double 2006 levels, but the fuel
will remain marginal as economics hobble further growth.

LOWER OPEC CAPACITY
The report points to a greater reliance on the 12-member
Organization of the Petroleum Exporting Countries, source of
more than a third of the world's oil.
While foreseeing higher demand, the IEA expects less supply
to come from producers outside OPEC and the agency also trimmed
a forecast for the group's unused production capacity.
"A stronger demand outlook, together with project slippage
and geopolitical problems has led to downward revisions of OPEC
spare capacity by 2 million bpd in 2009," said the report.
The forecast assumes no net expansion of capacity from Iran,
Iraq and Venezuela and that the 500,000 bpd of Nigerian
production that has been shut for a year will not reopen during
the next five years.
The IEA in its Monthly Oil Market Report has for the past
four months urged OPEC to open the taps to lower prices.
OPEC says crude supply is sufficient and blames other
factors, such as a strain on oil refineries, for high prices.
Some analysts say the IEA is being alarmist and that its
warnings about supplies are actually leading to higher prices.
"The International Energy Agency has put such a fear premium
in the market that crude futures remain bought no matter what,"
said Olivier Jakob of Petromatrix.

PLATEAU OIL
The IEA trimmed its forecast for supply from non-OPEC
producers by 800,000 bpd in 2011, partly because of project
delays, and touched on the thorny subject that oil supplies are
nearing a peak.
"Certainly our forecast suggests that the non-OPEC,
conventional crude component of global production appears, for
now, to have reached an effective plateau, rather than a peak,"
the report said.
Falling output at ageing fields and setbacks such as 2005's
hurricanes in the Gulf of Mexico have slowed growth in non-OPEC
output in recent years.
Lower supply from non-OPEC countries and rising demand will
boost the requirement for OPEC oil.
The IEA said demand for OPEC crude, or the call on OPEC,
will rise to 34.7 million bpd in 2011, up 1.3 million bpd from
the previous projection.

[drew]

Hey Mr Bill you cheeky boy!! Oops I meant 'peacocky', lol. I think curmudgeony perhaps describes the characteristics of the OP don't you think?? Anyways, on with my own stupidity....


BCE, which I bought for 39.71 at a moment of stupidity back in April looks like it will pan out after all. I was trying 'stock arbitrage' as explained by the Oracle of Omaha, and was lucky to escape losing a bundle thus far. Of course as anyone here knows I almost completely missed the run up.....

Ahem,.. saving face, the BCE is to be sold at 42.75 which will net me a measly 600 dollars for 9 months work. Ouch. Wait, I almost forgot the dividends. I missed the first quarter but I'm still good for a buck eight per share for the last 3 quarters, before the sale in January 08. That's a little better isn't it? It will give me about 11% for 9 months work. That I can live with. Now if Telus wants it I may make a bit more might I not?

Drew

[cube]

$this->bbcode_second_pass_quote('drew', '.')..
Ahem,.. saving face, the BCE is to be sold at 42.75 which will net me a measly 600 dollars for 9 months work...

Drew

[MrBill]

Drew wrote:
$this->bbcode_second_pass_quote('', 'H')ey Mr Bill you cheeky boy!! Oops I meant 'peacocky', lol. I think curmudgeony perhaps describes the characteristics of the OP don't you think?? Anyways, on with my own stupidity....

[BigTex]

I got a little spooked last week and sold all my energy stocks because I didn't understand what was driving the price of oil up so quickly while the "summer driving season" was being ushered in with falling gas prices. Things suddenly looked confusing and like the price per barrel was the result of too much speculation and not enough fundamentals. It was moving too fast.

Then came the IEA report, and if the markets are reacting to that then the price per barrel makes perfect sense, but yet U.S. gas prices are still flat.

I'm easing back into the market now, since apparently my fear of an imminent correction was unfounded and the IEA chatter seems to be pushing momentum in the other direction.

Long term, I really like the deep sea drillers, U.S. refiners and the big integrated cos. (CVX especially seems to have tremendous momentum). I like T. Boone Pickens' portfolio. Even with the recent runs, VLO's PE is under 10, CVX is right at 10, GSF's PE is 15. This suggests to me that these stocks still have plenty of upside, not to mention the panic buying that will occur once the PO story finally begins to penetrate the mainstream (whenever that happens, though the media coverage of the IEA report was very surprising to me). I can see these stocks selling at PEs of 20-30 in a PO frenzied market.

Any comments on my thinking?

[MrBill]

$this->bbcode_second_pass_quote('BigTex', 'I') got a little spooked last week and sold all my energy stocks because I didn't understand what was driving the price of oil up so quickly while the "summer driving season" was being ushered in with falling gas prices. Things suddenly looked confusing and like the price per barrel was the result of too much speculation and not enough fundamentals. It was moving too fast.

Then came the IEA report, and if the markets are reacting to that then the price per barrel makes perfect sense, but yet U.S. gas prices are still flat.

I'm easing back into the market now, since apparently my fear of an imminent correction was unfounded and the IEA chatter seems to be pushing momentum in the other direction.

Long term, I really like the deep sea drillers, U.S. refiners and the big integrated cos. (CVX especially seems to have tremendous momentum). I like T. Boone Pickens' portfolio. Even with the recent runs, VLO's PE is under 10, CVX is right at 10, GSF's PE is 15. This suggests to me that these stocks still have plenty of upside, not to mention the panic buying that will occur once the PO story finally begins to penetrate the mainstream (whenever that happens, though the media coverage of the IEA report was very surprising to me). I can see these stocks selling at PEs of 20-30 in a PO frenzied market.

Any comments on my thinking?

[MrBill]

Speaking of Russia this is just useful data with some good graphs for future reference.

$this->bbcode_second_pass_quote('', 'O')il and gas


Russia has the largest known natural gas reserves in the world and is the world's second largest oil producer after Saudi Arabia. Oil and gas accounted for about 60% of Russia's exports in 2005.







Europe depends on Russia for its energy and almost all existing pipelines head west.



Russia has been accused of using energy to exercise political control over some former Soviet republics such as Ukraine, Georgia, Belarus and Moldova.


In January 2006, Russia's state-owned energy giant Gazprom temporarily restricted its gas supply to Ukraine, demanding a 400% price rise to bring Urkraine in line with the global market.

This led to a 30% reduction in gas to the rest of Europe - and forced the EU to consider how to avoid becoming too dependent on gas from one source.


Russia is building a major new pipeline across the Baltic Sea, which will bypass transit countries such as Belarus, Ukraine and Poland and provide direct access to Western Europe.

[MrBill]

I thought today's inventory numbers might spark a decline in crude prices - a correction - but with a weaker USD that is not likely to happen now. Especially as there was a slight draw in the crude, even though the more important products showed a small build.

I stopped myself out of a small short position in the Brent after being in the money for most of the day. Oh well, it was just testing the waters, so not much loss, and I am not going to fight against this rally with so much wind in its sails.

The EIA/DOE released more info today than usual. It also gives us a look at output numbers that I have not seen in reports before. Here is a recap.

crude -1.4 mio to 352.6 mio bbls
gasoline +1.2 mio to 205.6 mio bbls
distillates +800k to 122.4 mio bbls
heating oil +613k to 32.95 mio

and for the first time (for me at least)
gasoline blending stocks 1.5 mio to 91.9 mio bbls

that is a net gain of +1.213 mio bbls w/out the blending stocks
+2.713 with them

imports -753k to 10.03 mbpd
product imports +233k to 3.99 mbpd (

also new)
gasoline output -173k to 9.23 mbpd
distillate output unch'd at 4.01 mbpd

refinery output +0.2% to 90.2%

gasoline demand +1.4% to 9.6 mbpd
distillate demand +3.6% to 4.13 mpbd
total demand unch'd at 20.82 mpbd

As I said, the market jumped about 50 points after the release of the nos. and has stabilized around $76.10 in the Brent and $72.80 in the WTI. That is down small on the day, but with the daily uptrend still intact. I think I will leave it alone for the time being. Take care and speak to you tomorrow. Cheers.

[Mechler]

$this->bbcode_second_pass_quote('MrBill', '
')
gasoline blending stocks 1.5 mio to 91.9 mio bbls

that is a net gain of +1.213 mio bbls w/out the blending stocks
+2.713 with them

[MrBill]

Thanks Mechler. I really should get out (of depletion economics) more, and check-out other posts. The problem is that I would probably start posting there and then never get anything done.


The crude market is about 50 points lower then where I bought back my short last night. Oh well...


I have the feeling that we are toppy up here, but no conviction!

[MrBill]

Let me know if you have trouble to access this article and maybe I can post the whole thing? Thanks.
$this->bbcode_second_pass_quote('', 'W')eb exclusive, July 2007



Environmental benefits
The options available to mitigate the world’s energy problems disconcert policy makers and executives alike. Securing new supplies of fossil fuels is difficult and often presents geopolitical risks; new technologies associated with alternative sources of energy, although attractive, involve significant levels of uncertainty and could have unintended consequences.1 Meanwhile, the prospect of reducing energy demand evokes fears that the consumer’s convenience and comfort would be compromised—an unattractive proposition anywhere and an unacceptable one in the developing world, where globalization and rapid economic growth, fueled by increased energy consumption, are improving the prospects of hundreds of millions of people.

Yet McKinsey research shows that the growth of worldwide energy demand can be cut in half or more over the next 15 years, without reducing the benefits that energy’s end users enjoy—and while supporting economic growth. The key is a concerted global effort to boost energy productivity (the amount of output achieved from each unit of energy consumed).2 (A joint research project conducted by the McKinsey Global Institute (MGI) and McKinsey’s global energy and materials practice. For the full report underlying this article, see Curbing Global Energy Demand Growth: The Energy Productivity Opportunity, May 2007, available free of charge online.)

The exhibits that follow examine these opportunities by focusing on four sectors that represent 98 percent of end-use demand for energy around the world. Capturing the full range of these opportunities would improve global energy productivity by 135 quadrillion British thermal units (QBTUs), saving the equivalent of 64 million barrels of oil a day—almost 150 percent of the energy the United States consumes now. What’s more, an intensive focus on improving energy productivity would spur new markets for demand-side innovation and thus generate important business opportunities for manufacturers, utilities, and other companies.

Yet market forces alone will not produce such outcomes. The obstacles that thwart improvements in energy productivity include information gaps, market-distorting subsidies, an inadequate financing infrastructure, and misaligned incentives. To overcome such barriers, policy makers must terminate distorted policies, make the price and use of energy more transparent, create new market-clearing and financing mechanisms, and selectively implement demand-side energy policies (such as new building codes and appliance standards) while also encouraging demand-side innovation by companies. Although these actions will be difficult politically, the rewards would be profound. Capturing the opportunities we have identified would not only cut the growth of energy demand dramatically but also be among the most economically attractive ways to reduce greenhouse gas emissions.

[Bas]

Hi mrBill, I wonder what you make of the trend that in the last three years the new record high's (typically of a little more than 10% vs the last record) were set in/around august after which the price would go down by 25% or so from that new high for most of the rest of the year and the first half of the next. Does that make it a relatively safe investment to go long in the middle of that "25% low season" and short after typically the prices start to fall from that 10% high, say at the end of september. (though going short in a market with a general upward trend is ofcourse more risky than going long) And what do you think will be the maximum low between this summer and next year's? around 70?

Edit for another question: When do you think expensive oil will result in the first stockmarket downturn?

[MrBill]

$this->bbcode_second_pass_quote('Bas', 'H')i mrBill, I wonder what you make of the trend that in the last three years the new record high's (typically of a little more than 10% vs the last record) were set in/around august after which the price would go down by 25% or so from that new high for most of the rest of the year and the first half of the next. Does that make it a relatively safe investment to go long in the middle of that "25% low season" and short after typically the prices start to fall from that 10% high, say at the end of september. (though going short in a market with a general upward trend is ofcourse more risky than going long) And what do you think will be the maximum low between this summer and next year's? around 70?

Edit for another question: When do you think expensive oil will result in the first stockmarket downturn?

[BigTex]

If the NASDAQ could be pumped to 5,000 in 2000 before crashing, I think oil has a LONG way to run before it's over. The reason I say this is the average investor has still not caught on to the reality of future supply not being able to meet demand. When this idea penetrates the market down to the small investor, I can see a mania that will make the tech boom seem tame. I mean, this situation is grounded in REALITY, the tech boom was based upon a fantasy. In an environment like this, who knows what "toppy" is?

I am reading "The End of Oil" right now. It's a pretty good book, well researched and balanced. It came out in 2004. At one point in the book, he talks about some future energy modeling that a study group had done. In one of the worst case scenarios radicals stage a coup in SA and reduce SA's output by 20% for 5 years and refuse to sell to certain customers. In this scenario, the model projected per barrel prices to jump to the $50s, "maybe even for several years" before falling back into the $30s and $40s.

Reading that "worst case" projection from only three years ago makes me realize that we could be at $200 a barrel in three or four years and people would be talking about price floors in the $190s.

It also reminds me of what T. Boone Pickens said when asked whether the price of oil was based upon a high "terror premium". He replied: "Who sets that premium? When do they meet? There's no 'premium', there's just the market price."

I want to keep from getting too swept up in speculative and delusional thinking, but when the average P/E of the integrateds, refiners and drillers is in the 9 to 12 range, and Apple is selling at a P/E of 40, I think to myself "the energy mania hasn't even started."

[MrBill]

BigTex, you may very well be right. Big Oil is riding high at the moment. It was too early to talk about a top in crude obviously. The price punched through resistance this afternoon already. As usual, that first loss I took was the best loss. It looks cheap now.
$this->bbcode_second_pass_quote('', '"')Well, look who's still riding high: Six of the top 10 companies on this year's list are pumping petroleum, and three more are making vehicles that burn it," according to Demos. "True, Wal-Mart regained its title as the world's largest company, at $351.1 billion in revenue. ... But the big story was oil."

[BigTex]

I agree with you about the "how much higher can it go" reasoning, but my line of thinking has two components: first, I think the fundamentals of the energy industry are sound. Although this sounds like an obvious observation, it's worth noting, because many manias are based upon "groupthink" around industries that are not fundamentally sound--tulips, internet startups, etc. Sound energy business fundamentals (stable or increasing demand that appears to be fairly inelastic, good management, VERY high barriers to entry, etc.) would be reason enough on their own to buy in today--I'm not concerned if a company has gone up 50% if the P/E is still under 10 and insitutional investors are piling on (I'm thinking XOM and CVX here).

My second line of thinking has to do with completely irrational market behavior. The PO "story", when it gets out in some kind of dumbed down sound byte format, is enough to evoke wild notions of doom, despair, and all manner of horribles--just like the daily chatter on this forum, except circulating in the mainstream. I am just imagining the upward pressure that a sudden surge of fear buying will have on energy stocks, and how the higher it pushes prices, the more the mania will take hold--the initial surge will be driven by fear, and it will be sustained by greed, as everyone starts to hop on the bandwagon. Even insiders will be hesitant to get out, not knowing if a given high looks like a top, since tops in a craze are hard to identify. When P/Es get to 20 or 30 on the big energy companies, I will start thinking they are toppy, but I think the runup in energy prices to date has had a "calculated" feel to it that I don't remember sensing in the NASDAQ runup. I think we are still in store for a "mania" phase where the proverbial "shoe shine boy" is buying XOM on margin. Fundamentals become irrelevant when people start herding up in this kind of formation.

Note, too, that Warren Buffet sat out of the tech boom, but has jumped right into the PO play with his U.S. rail investments.

The weak dollar is just going to be a tailwind.

In a big market correction, I think people are going to look for safe havens and find it in energy, which will likely blunt energy sector losses compared with the rest of the market. Even in a declining energy demand environment, if production is declining as well this will cause energy prices to remain high. This is probably the most critical assumption in my analysis (and it may not be correct).

I'm also assuming there will be ongoing and perhaps accelerating political unrest in the oil producing countries to keep the boat rocking as well (probably a safe assumption here).

I may be wrong. What do you think?

[Bas]

$this->bbcode_second_pass_quote('', 'T')he weak dollar is just going to be a tailwind.

[BigTex]

$this->bbcode_second_pass_quote('Bas', '')$this->bbcode_second_pass_quote('', 'T')he weak dollar is just going to be a tailwind.

[Bas]

$this->bbcode_second_pass_quote('', 'I')f you think about it, there would be no economic reason for capital in another currency to be invested in the U.S. stock market right now based upon the weak dollar