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Milton Friedman explains Individual Freedom

 Today's Market  Today:

Crude Oil & NG Inventories
Research for Online Investors

by John Dalt

3/11/10

Crude oil inventory increased 1.4 million barrels last week, according to the Energy Information Agency (EIA). Gasoline inventory dropped 1.9 million barrels, but inventories are 7.8% above last year’s levels. Distillate (diesel) inventories are down 2.2 million barrels, and for the first time closing in on year ago levels. No doubt traders have noticed this and believe the market may be reaching a balance in supply and demand.

Traders should at inventory levels farther back than one year ago. At this time last year distillate inventories had ballooned 30% over previous years because of the economic slowdown. When the economy tanked after the credit crisis, transportation was one of the first sectors to suffer. When goods don’t move, you don’t burn diesel. This year’s inventory levels are meeting a rising inventory level from last year.  This glut on the market of oversupply has been evident for the last sixteen months. Below is the graph of crude oil stocks in the U.S. We do not believe the inventory data supports higher prices in crude oil at this time.

That red line of current supply is clearly moving the wrong direction.  We would love to short USO on this chart, but that line of action is fraught with danger.  Remember Iran, Al Qaeda, Nigerian rebels, and others can change the availability of crude oil without notice.

Natural gas has been on a downtrend in price for the last year. Shale exploration has produced additional supply and the credit crisis slowed industrial use setting up a classic supply demand price adjustment. You can see from the graph below that starting last spring the red line of supply started moving to the top side of the 5-year average, and stayed there until the last few weeks.

Natural gas burns clean and is the preferred fuel for industrial use.  Transportation is as simple as hooking up to the underground line running down most streets in America.  Natural gas is also used for demand load electrical generation.  Natural gas electrical plants are inexpensive and can be built quickly.  At present prices, electricity produced with natural gas is cheaper than from coal.

Natural gas storage was down 111 billion cubic feet (Bcf) last week. Storage is below last year’s level dropping 6.4% in the last week. Last year storage dropped 4.2% and the five year average shows a 1.2% build during the same week. Traders seem stuck in a view that gas will reappear as UNG fell today after the storage report was released. Your editor owns UNG, or as I like to call it “ugh.”

Our conclusion on these two commodities, oil is overpriced based on the inventory data at the present time.  Wild card events make the trade difficult to short.  Natural gas storage reports show continued depletion, this should reverse in the next month.  April marks the building of inventories for the next winter heating season.  If the red line of current storage does not make the turn higher with the five-year averages, natural gas prices could move higher quickly.

Our quote of the day:

“But we have to pass the bill so that you can find out what is in it, away from the fog of the controversy.” -- House Speaker Nancy Pelosi

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions. It may contain errors and you should not make investment decisions based solely on what you believe you have read here. Do your own research, it is your money. If you lose it, it is your responsibility, not ours or your grandmothers! The editor may or may not have a position in any securities discussed. The editor may have held a position in a security earlier, or in the future.

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