Two diverging agendas may be on a collision course. On the left, Venezuela's president Hugo Chavez is trying to talk oil prices up. On the right, Fed Chairman Greenspan is trying to do the opposite. With oil supply data on the way, we wonder which one knows what, and what the outcome of their indirect dispute over the direction of oil prices will do to the markets.
Oil is in the headlines. Congress wants to investigate U.S. companies selling oil to foreign interests. Well known oil man T. Boone Pickens, who has been correct about this market about as well as anyone else, was on CNBC talking about $60 oil, after some short term weakness. Reports are surfacing about OPEC's capacity being maxed out. And Mr. Greenspan came out on the wires as saying that market forces will correct any imbalances.
Yes, it's getting to be that time of the cycle, when things are about to get crazy. And for the oil bulls, it may be a time to consider their next move.
As interesting a story as any is the notion, emanating from Caracas, that OPEC is out of production capacity. According to AP: "The Organization of Petroleum Exporting Countries is running out of spare production capacity, Venezuelan Oil Minister Rafael Ramirez said Tuesday. ["OPEC's production capacity is reaching its limit,"] Ramirez told reporters, adding that it is too early for OPEC to decide on a possible half-million barrel per day production increase."
The remarks are interesting, considering the source, since Venezuela is a leader in the cartel for keeping prices high, and is also a member whose infrastructure has been questioned after the strike from a few years ago, where President Hugo Chavez was removed in a failed coup.
During that strike, which we were among the first to predict, much of Venezuela's until then, sophisticated oil industry infrastructure was damaged, and it is not certain how much has been repaired since, and how well it's been repaired or replaced, given Chavez' emphasis on a military buildup and the expansion of his Bolivarian revolution.
Part of the problem with gasoline supply in the U.S. of late has to do with refinery problems in Venezuela. According to AP: "Venezuela's state-owned oil company successfully restarted one of four crude processing units at Amuay refinery in western Venezuela and expects it to be operating normally by the end of the week, an official said Monday."
Congress Wants Oil Data
A Democratic Congressman wants to know which companies have been exporting oil from the U.S. According to Netscape.com: "Democratic Sen. Ron Wyden of Oregon -- often a critic of big oil firms -- says information on the 268 million barrels of U.S. petroleum products exported in 2004 is needed as Congress considers a broad energy bill."
In a letter to the Commerce Department Wyden requested "Information about the export of gasoline, diesel and aviation fuels as well as other petroleum products out of the U.S. is directly relevant to the coming Congressional debate on how to address our nation's dependence on imports of oil and other petroleum products." The request has been denied, as "Charles Kincannon, who heads the Census Bureau, told Wyden last week that he could not release the export information to an individual member of Congress."
According to the report: " The United States consumes about 20.8 million barrels of petroleum a day, with imports accounting for about 58 percent of supply. However, about 1 million barrels of U.S. oil petroleum products are exported daily."
Fed Chairman Alan Greenspan told a group of refiners in San Antonio that oil demand has slowed "modestly," and that "market forces" could "eventually cool off" the recent "frenzy" in oil prices.
According to the Wall Street Journal Mr. Greenspan told the gathering that "Energy markets are under the greatest strain in decades," but found it possible that "higher prices eventually should soften demand for energy and boost supply."
According to Reuters Greenspan described the current scenario as one of "Slower rising demand and increasing output" and that the change in conditions "had already led to faster oil inventory building – adding that stockpiling could pickup further as producers seek to cash in on higher futures prices."
Addressing infrastructure concerns in the petroleum industry, Greenspan added that "the investment needed to bring the oil to market had fallen short of what was needed to ["match unexpected recent gains in demand, especially gains in China." ] He also expressed concern about a lack of world crude oil refining capacity, calling it ["worrisome."] "
Greenspan added some interesting comments in his remarks, when he "said the recent price of benchmark crude was only slightly above the highs of October, but noted prices for heavier grades had risen notably." According to the Wall Street Journal "benchmark light sweet West Texas Intermediate crude is only about $2 more expensive a barrel than at its peak last October, heavier crudes are about $12 a barrel more. Heavier crudes require more refining to become gasoline and other end products." Venezuela is a leading producer of heavy crude.
More interesting is this, according to the Journal: Greenspan "also noted that unlike last fall, the price of oil for delivery six years in the future has kept pace with the latest run-up in spot prices, suggesting markets are less optimistic that the era of higher-priced energy will be short-lived."
When the mainstream media starts covering a story with the earnest that it's now involved in oil, we take notice.
And when Venezuela, which produces a large amount of the heavy oil used in the U.S. starts talking about OPEC production being maxed out, we take notice.
But perhaps, the most subtle of all the remarks came from Greenspan, when noted that prices for heavy crude were rising faster than for the benchmark Light Sweet, which is the one widely quoted price.
If heavy oil prices are moving higher, and there are signs of a buildup of other grades of oil, while there are some signs of a potential slowing in demand, it seems natural that those who produce heavy oil will try to keep those prices up as long as possible.
It looks as if Mr. Greenspan and Mr. Chavez are at odds. No shocker there; except the timing. One side wants to keep oil prices high for its own gains, while the other is trying to keep the global economy from imploding. Makes for an interesting story, and it could be just the beginning, since Greenspan will speak again today.
Wouldn't it be interesting to see a top in oil in the next few days to weeks?
Oil Market Summary And Outlook: Oil Supply Data Could Define Intermediate Trend In Oil
Today's oil supply data, released at 10:30 Eastern Time, and provided by the U.S. Department of Energy and the American Petroleum Institute is crucial. Not only is the data important for the usual weekly trading action, but it could well set the tone of prices in many markets over the next few days to weeks.
If there is another rise in crude oil stores, as we've seen in the last few weeks, the case for supply shortages weakens. The problem will continue to be what the status of gasoline turns out to be. As crude supply has grown, so have gasoline stores fallen.
According to Marketwatch.com: "Traders are expecting Wednesday's U.S. inventory updates from the American Petroleum Institute and the Energy Department to show another increase in crude supplies. Platts is expecting to hear that the nation's crude stocks rose 2.6 million barrels in the latest week Gasoline inventories are expected to be down by 1.3 million barrels, while distillate stocks are seen falling 1.5 million barrels. Fimat is forecasting a 1.25 million-barrel rise in crude supplies. John Kilduff, senior vice president of energy risk management, is expecting distillates to be down 700,000 barrels on the week and gasoline to be up 500,000 barrels."
Last week, Goldman Sachs shook the markets up with a prediction of $105 dollar crude. Earlier this week, as we reported here, market Analyst Tim Evans of IFR Energy Services told the Associated Press that he expects crude oil prices to fall to $28 per barrel this summer. Evans is obviously at the opposite end of Goldman Sachs, who last week predicted oil to rise to $105 per barrel, but did not give a specific time frame for the development.
Prices eased slightly overnight, with crude trading below $56 per barrel in electronic pre U.S. action. Energy stocks were less than enthusiastic on Tuesday trading.
We tend to agree, at least in principle with Evans, and have noted so in this space many times. Oil prices will come down at some point, although it is hard to predict when.
At the current time, we are again noticing that crude made new highs last week and that oil stocks did not confirm them, meaning that once again we are seeing that old technical divergence appear. We like to see oil stocks lead the price of crude, or at least confirm new highs in the commodity.
To be sure, this remains a bull market in oil until proven otherwise, given the fact that crude futures recently made new all time highs, and that key support levels, such as the 50 day moving average for the June contract remain intact.
The Philadelphia Oil Service Index (OSX) looks better than XOI, and may still to challenge its recent highs near 146. OSX is above its 20 and 50 day moving averages. Volatility will likely increase here in the next few days. 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) has made three lower highs and an equal number of lower lows in price since topping out in February, despite a series of dramatic new highs in the commodity. This is a sign that the oil market may be trying to make a top. The scenario would change if XOI took out the old high near 893.
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