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Morning Petrospective – July 13, 2010

July 13 2010, 08:27

Morning Petrospective – July 13, 2010

il prices sold off on Monday as traders looked for bullish factors upon which to base a continuation of last week’s advance – in vain. The DJIA was lackluster through Monday’s trading session, and investors were in a wait-and-see mode as the earnings “season” (for the second quarter) got under way. Alcoa, the first to release its quarterly figures, did not give the market anything to react to until very late in the day. It announced a profit, in contrast to the weak demand and poor prices of a year ago. Its earnings beat expectations by a penny on reportedly strong revenues. The DJIA ended the session up 18.24 to 10,216.27. Oil prices did not have much positive guidance from equities and finished in negative territory.

It was the first day in a while that oil prices did not post a similarly-sized move as the DJIA did. All last week, the crude oil market mirrored the Dow by moving in single digits, double or triple digits according to what had been seen on the Dow. On Monday, crude was lower while the DJIA finished higher.

It was caution more than anything else. We would expect to see oil prices rally slightly in response to the quarterly earnings figure released by Alcoa, later tonight. Investors are eager to buy oil futures, apparently, or at least that is what we thought we saw last week. It did not take much to reignite interest in the so-called “carry trade,” which has nothing to do with carrying costs and everything to do with the negligible cost of borrowing money (for some large players). It is the equivalent of the Latin word (in science) for “risk appetite.”

The fundamentals are what they have been for a while, now. Stocks are plentiful and near multi-decade highs (in the case of distillate). There is plenty of oil available right now, especially in terms of days of forward supply. If this were 10 years ago, oil prices would be trading at less than half what they are right now, possibly even a third of existing prices. Demand has been increasing recently, but we are comparing it to last year’s extraordinarily weak demand, in the heart of the recession.

Tomorrow, we should see traders start to look at this week’s inventory figures. All three major wire services are looking for substantial drawdowns in distillate, decent builds in distillate stocks and milder draws in gasoline stocks. We are actually looking for a build in gasoline stocks because we do not expect to see another week of strong withdrawals from primary storage so soon after July 4^th. Each of the last three years has given us an increase in gasoline inventories, and demand in gasoline has been the weaker of the the two major refined products (distillate being the other).

Last week, we were expecting to see oil prices move lower because of poor economic statistics lately. Our bottom line has been that without a regular diet of positive economic data supporting the idea of a growing economic recovery, the fundamentals in this market are just not strong enough to support upside movement. We did not factor in the investment community’s hunger for reasons to buy oil, nor did we factor in the bulls’ ability to import economic data – like Australian employment – to provide themselves with reasons for risk gluttony. We need to be aware of that as we continue this week.

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FMX Newswire is an overnight news summary designed to meet the needs of professional energy traders. The content is to-the point, professional grade and not widely reported in the mainstream media. All sources are professional respected firms and newspapers.

Platts oil

Highlights of new drill ban: doesn't use water depth as criteria, instead suspends activities on basis of drilling configuration, technology.
Interior says new ban needed because problems found on blowout preventers for 2 relief wells BP now drilling to kill Macondo.
Problems are: leaky valves that resulted in test failures; failure of "deadman" system; broken solenoid connection on control pod.
Delek Europe is in advanced negotiations with a consortium of French banks to finance its deal to acquire BP gasoline stations in France.
The International Energy Agency sees world oil demand rising by 1.3 million b/d to 87.8 million b/d in 2011.
The US military is looking into allegations that oil is being smuggled from Iraqi Kurdistan into Iran in defiance of US sanctions.
Tighter US and EU sanctions will hit Iran's energy sector both in the near term and the longer term, the International Energy Agency says.
BP says it's talking to "a number of companies" about selling assets to help pay for the escalating cost of the Macondo oil spill.

Bloomberg