Watch the Fireworks in Oil Land
by Dr. Joe Duarte
|Thursday, May 13, 2004
Forty dollar oil is now a fact of life, at least for now. The problem, from a technical view point in the stock market, is that even though the commodity is now trading at 13 year highs, the stocks of the companies that explore, and market oil are not making new highs. Refinery stocks are acting reasonably well, as are some of the larger integrated names. But with prices at all time highs, profit margins are almost certain to increase.
What we see as we drive past gas stations selling premium gasoline at $2.00 a gallon and higher, is that there are no gas lines. In fact, we are actually seeing fewer cars on the road that we saw last week.
The International Energy Agency told the world on 5-12 that demand for oil continues to increase. But, supply, although thinner than it was last year, is not at crisis levels, at least not yet. And the U.S. is building a massive set of levels in its strategic reserves.
Also interesting is the fact that even in the latest set of reports by the U.S. Department of Energy and the API, there was one small glimmer of hope, distillate supplies showed a build. Distillate is the most sensitive of the economic predictors in the oil markets, as it includes diesel and airline fuels. Buildups in distillate often suggest that an economy is slowing.
To be sure, the U.S. is facing tight gasoline supplies. And there is a significant shortfall in refinery capacity. Both those factors should keep oil prices higher than they would have been otherwise, as long as people keep driving their cars. Meanwhile, it seems that OPEC is more than likely unable to increase production significantly, while Russia, the only other potentially major swing player is already pumping as much as its own capacity allows.
But, we wonder what would happen if enough people decided to telecommute, or car pool, or suddenly take the train or the bus. Or if the potential U.S. exit strategy, outlined above, begins to deliver successes.
The Philadelphia Oil Service Index (OSX) has fallen part, although it has barely remained above its 200 day moving average. OSX remained well below the 100 area. 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 recovered but barely made it back above 600, even as crude prices . This is still a crucial juncture for the entire oil sector, as a continued failure in the near term could lead to a major top forming. 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.
In the current market, we recommend a copy of Successful Energy Sector Investing: Every Investor's Complete Guide. The 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.
Did The May 12 Rally Change Anything?
The late afternoon rally on 5-12 was impressive. But the big question is whether it was just a case of the shorts getting nervous and delivering a fitful bit of covering, or whether it was truly a sign of a bottom.
The truth is that we should know the answer in a few days.
But the early indications are mixed.
Oil stocks sat the rally out mostly, even though oil closed above $40 for the second day running. This is still a non confirmation, and unless corrected, could be a signal that there is a top forming in crude.
Valero Energy (NYSE:VLO), our refining bellwether is acting better than the rest of the majors, but may not be enough to keep the entire complex afloat.
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