Oil Madness: $54 Today. $60 Tomorrow?
by Dr. Joe Duarte
|Tuesday, October 12, 2004
There's plenty of oil, but it's going nowhere, meaning that prices will remain artificially high due to downstream capacity not being able to keep up with the demand.
Oil prices blasted above $54 overnight, as the U.S. Department of the Interior was quoted in the Wall Street Journal as saying that "damage to pipelines is keeping a substantial amount of oil and natural-gas production offline in the Gulf of Mexico, and much of it may not return until next year."
Separately, the IEA, in its monthly report, according to the Wall Street Journal The International Energy Agency said Tuesday that "world oil supply in September rose sharply, led solely by OPEC and notably Iraq, though Hurricane Ivan in the U.S. contributed to a non-OPEC output decline. The agency said OPEC pumped 29.9 million barrels a day in September, an increase of 710,000 b/d on August. But the growth in supplies is unlikely to cool soaring oil prices as spare production capacity shrinks and underinvestment in refineries and shipping logistics causes bottlenecks, the IEA said in its monthly oil market report."
Oil Markets: Time To Be Careful
Oil was trading above the $54 price area on 10-12.
The hype season is now upon us, as we would expect all major media, local news, and local newspapers to start producing major oil headlines.
On 10-11, we wrote that despite the fact that the oil market seemed bulletproof, at some point all of the positive news will be fully factored in, and the market will break. How much higher oil can go is as futile a prediction as any. How high did the Internet stocks go? Much higher than anyone expected, certainly years beyond Mr. Greenspan's irrational exuberance speech.
As we noted in our Market Moves section, the fact that Lone Start Technologies, a fairly good bellwether for oil had a tough time on 10-11, indeed puts us on alert.
At this point it's best to watch the charts, and to keep an eye out for outrageous statements from traders and politicians. There are none at this time. Not even Senator Kerry is blaming President Bush for higher oil prices, or calling for Congressional investigations into oil company price fixing, the usual hallmark of a pending top.
There are still no lines at gas stations. There are no protests in the streets. There are no infomercials on TV hawking miracle additives to make a tank of gas last longer. And the nightly news are not airing stories about how poor families are not feeding their children so they can fill up their car.
Honda has introduced a hybrid natural gas/electric version of its popular Accord. But we are not seeing GM hawking hydrogen cars.
We are not being cynical. But it is usually when all of these things start happening that we see a top. Some of them are now visible. But, unless this time is different, oil prices can still go higher.
This remains a buy and hold those who are willing to ratchet up sales stops on held positions. To trade this market without protective stops is, in our opinion, insane.
Natural gas is still an important feature of energy, as the December and February futures contracts closed, above $8.
The Philadelphia Oil Service Index (OSX) remained above 120 but were weak on 10-11. For more details on trading the energy sector visit our energy timing page, featuring our highly effective OIH timing model and our Top Ten Energy Stock List.
The Amex Oil Index (XOI) again closed above 700. This remains uncharted water for the oil stocks. A pull back of some significance would not be out of the question here, given the size of the one day move on 9-21. For immediate analysis, including stock picks, and the latest in technical analysis of the entire energy complex, our subscriber section has a full complement of recommendations in oil service and the rest of the energy complex.
Has The Bell Rung For Oil And Commodities?
$54 dollar oil is grabbing the headlines, as delivery bottlenecks reach critical stages.
A key oil market bellwether got dismembered on 10-11-04, raising questions about whether indeed the current rally is sustainable.
Today, we look at raw material prices and the effect on the business of oil exploration.
Lone Star Technologies (NYSE:LSS) was featured in "Successful Energy Sector Investing," as a stock which has the uncanny ability to predict the future of oil prices.
LSS makes the steel pipes and tubes used by the oil industry in pipelines, refineries, rigs, and general exploration operations.
The stock tends to bottom or top out some time before the rest of the oil sector does, which means that the huge sell off on 10-11, might be a warning of worse things to come.
The reason for the sell off is quite interesting, as LSS warned that it would only make 0.85 cents for its upcoming quarter when analysts expected $1.35 per share.
Lone Star's reason was higher expenses for raw materials.
So we had a look at the steel stocks, and found that U.S. Steel (NYSE:X), a pretty good gauge of market expectations for the group, also pulled back on 10-11.
X has support at the 34-38 area, so Monday's action does not necessarily mean that it is the end of the run for steel.
Yet, it is something to keep an eye on.
And just to be complete, we had a look at the Chicago Mercantile Exchange shares (NYSE:CME).
This stock, more than any other has been the bellwether for the commodity rally, since it is the place where industrial metals and currencies trade.
CME shares topped out a few days ago, near 170.
We'll be watching for other warnings in the steel related areas.
If it becomes clear that the problem extends beyond LSS, we could be nearing a key inflection point in the commodity stocks.
With analysts tripping over themselves to down grade tech stocks, and issuing sell ratings, the action in LSS might be a clue as to where the next sector rotation is coming.
And here is the bottom line: there is plenty of oil out there now. It just can't get to market due to hurricane related pipeline problems in the Gulf of Mexico and transportation constraints, as well as refinery bottlenecks.
At some point, though, it will get to market.
Oil traders have not begun to figure that last point into the price of crude..yet.
If Mr. Bush opens the Strategic Oil Reserve, as the election nears, we could see a whole lotta shakin' goin' on in the oil markets.
In the Rigzone Store:
Successful Energy Sector Investing: Every Investor's Complete Guide
Dr. Duarte's book predicted many of the current developments in the economy and the energy markets, and provides an excellent set of benchmarks and trading lessons for what could be in store for the future.