CL Redux

GM :) Just getting rolling.

Here's an article I haven't read yet.

Commodities Corner
Myra P. Saefong

July 1, 2011, 12:01 a.m. EDT
Oil’s set for a summer of ‘slumps or sizzle’

By Myra P. Saefong, MarketWatch

SAN FRANCISCO (MarketWatch) — Crude-oil’s spike to a price peak of nearly $114 a barrel by the end of April was almost as impressive as its recent two-month dip but to market experts, it all makes sense — and there’s more volatility to come.

“The volatility in the energy sector has been extreme in 2011,” said Kevin Kerr, editor of Kerr Commodities Watch. “Currency upheaval, unrest in the Middle East and fears of a global economic slowdown have all caused prices to act very erratically. Traders can expect this to continue.”

After ending last year around $91 a barrel, crude-oil futures (NMN:CL1Q) peaked at nearly $114 a barrel on April 29 to score a gain of about 25%. They dropped to around $95 by Thursday, down 16% from the high.

“Oil prices simply got away from themselves earlier this year,” said Matt Insley, editor of the Daily Resource Hunter. “Clearly, there was some speculation that turmoil in the Middle East, starting with the uprising in Egypt, would eventually have a major effect on oil output.”

But “the worst-case scenario never panned out,” he said.

In early March, investors were already wondering how long the triple-digit prices for oil would last because prices hadn’t seen such levels since 2008. Read a story from March about $100 oil.

At the time, protests in the Middle East and North Africa were raging. While there are new developments in the region each day, the turmoil is far from ending and in Libya the battle for leadership and the ouster of Col. Moammar Gadhafi continues.

What’s actually changed to drag oil prices lower is a surprise decision by the International Energy Agency to release 60 million barrels of oil from reserves and concerns about weaker oil demand, as global economies struggle and Greece paves the way toward a financial bailout.

“Oil prices initially lost momentum on concerns about the sustainability of oil demand in the face of cracks that have started to appear in the global economy,” said Matt Parry, chief economist at KBC Energy Economics.

Greece’s financial woes have been in focus for months and “it’s not all milk and honey in the U.S., Japan or Korea, whilst even the rapidly expanding emerging market world is starting to creak under pressure from escalating interest rates,” he said. “So oil prices were already inching down on the general demand malaise” before the IEA “came in and twisted the knife by surprising everyone with their stockpile release.”
Political motives

The IEA announced on June 23 that it will release a total of 60 million barrels of oil in the coming month, with the U.S. tapping its Strategic Petroleum Reserve to contribute half of that. Read more about the IEA decision.

The move was aimed at making up the loss of oil supplies from Libya, which removed 132 million barrels from world markets by the end of May, the Paris-based agency said.

Just a few days after the release of an oil stockpile, crude prices bounced back after a short dip, Dow Jones Newswires Dan Strumpf reports. (Photo: AP Photo.)

The IEA move might just turn out to be an incredibly wise one, “particularly if the world was edging towards a dreaded double dip recession,” said Parry, who sees a 20% probability for a double dip recession.

But Bob van der Valk, a petroleum-industry analyst based in Terry, Mont., referred to the IEA release as “unnecessary” since the price of Brent and West Texas Intermediate crudes had already dropped by around 10% since news of al-Qaeda leader Osama bin Laden’s death broke out in early May. “The fear factor in the oil market was diminished after Osama bin Laden was killed,” he said.

And the amount of the release is really just a drop in the bucket.

The 60 million barrels is about 43 days of lost Libyan barrels and less than 0.2% of annual global oil demand, according to Kerr.

The entire IEA decision could be “absorbed” by the potential Chinese increase in diesel consumption in two months before the rainy season, he said, as China suffers from severe drought conditions, curtailing hydroelectricity generation and forcing electricity consumers to replace the energy source with oil.

So it’s no surprise that analysts point out politically-driven motives for the IEA, which have added and will continue to add uncertainty and volatility in the oil market.

“The IEA/DOE story is yet to play out,” said Tom Kloza, chief oil analyst at the Oil Price Information Service (OPIS). “My sense is that the [oil] auction isn’t about 2011. It’s calculated to send a message to OPEC moderates and fence sitters and institutional money managers.”

“The coordinated action is perhaps intended to remind the former that ignoring the ‘greater good of the world’ has consequences,” he said.

On June 8, OPEC members were unable to come to a decision on increasing supply quotas and left output targets unchanged. Read about the oil market’s reaction to OPEC.

The IEA immediately expressed disappointment that OPEC was “unable to agree on the need to make more oil available to the market.”

After the OPEC meeting, Saudi Arabia said it would pump as much as 1.5 million more barrels per day until the end of the year, according to van der Valk.

A Saudi prince has reportedly implied that Riyadh would “squeeze” Iran by using its pull in the oil sector to hurt Tehran’s ability to finance its nuclear ambitions. Read the Wall Street Journal report on Saudi Arabia’s warning to Iran.

And with prices back up to pre-IEA announcement levels, there could be a second release of oil, warned James Williams, an energy economist at WTRG Economics. “We are not seeing much staying power in the price effect.”
What next?

Despite everything that’s happened so far to impact the oil markets, one thing analysts appear to agree on is the commodity’s resilience.

“Even with all the debt default issues, continued economic frailty and simmering Middle East unrest, the [WTI] market only pulled back to $90 a barrel,” said Neal Ryan, a managing partner at Ryan Oil & Gas Partners LLC.

The market entered a new price range in the last week and Ryan said he believes the $90 level may be the new floor for prices.

So maybe it’s time to take another look at oil company shares.

“As someone who watches oil prices daily and looks for the best investments in the space, I’d have to say that right now is a great time to buy or re-buy your favorite oil companies,” said Daily Resource Hunter’s Insley. Read his latest articles on oil.

Justin McNichols, a managing director at Osborne Partners Capital Management, said that after the recent 15% correction in oil service, his wealth management firm believes the sector became “compelling” last week, and it favors Schlumberger Ltd. (NYSE:SLB) and Cameron International Corp. (NYSE:CAM) among the oil service companies and Ensco PLC (NYSE:ESV) in drilling.

All in all, the oil market’s experiencing some “pretty exciting and dynamic stuff,” said OPIS’s Kloza. “Summer can be boring, but this could be a summer of slumps or sizzle” depending on how it plays out.
 
You can see CL is under a lot of pressure so far. Tried a few longs out of the bottom and bailed.


ADD Don't forget the Mich Sentiment in 5 mins.

ADD 2 and the ISM is in 10 mins.
 
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