California Mess, Crude Supply
Research for Online Investors

by John Dalt

6/24/09

California’s budget troubles are not going away.  Moody’s Investor Services warned the Golden State it faces a “multi-notch” downgrade to its credit rating if the legislature does not produce a budget that closes the $24.3 billion deficit.  The state’s current A2 rating is the lowest rating for any state’s general obligation bonds.

Last Tuesday, and then again this past Monday, I wrote about ADXTF bidding on Iraq oil concessions.  Today, China’s Sinopec oil company offered to buy Addax for $46.17 per share.  That is a premium of almost 16% over closing price yesterday.  I hoped this would not happen; they left a lot of money on the table.  Of course, a bird in hand is worth 16%!

China is going all over the world to lock up supplies of key commodities.  This is just the latest example of the Chi-coms flexing their capitalist muscles.  It is not a level playing field, our laws require companies to only do business with certain countries, and cannot pay bribes.  China goes anywhere, ignoring human rights, and plays by no rules except “Do the deal”.

Durable goods orders were up in May for the second straight month.  Orders for non-defense capital goods jumped 4.8%.  This was the biggest jump since September 2004.  These two good economic indicators set an optimistic tone for the market this morning.  New home sales fell, but investors seemed to ignore it, until the FOMC announced they were going to leave rates at 0.00 to 0.25%.

The Fed announcement and accompanying notes caused a sour note, and the market sold off into close.  The Fed’s notes concerning inflation and a slow recovery raised concern.  20-year treasuries dropped like an anvil on thin ice.

The biggest non-news was the EIA (Energy Information Agency) report on petroleum.  Crude oil continued its inventory depletion that has been the norm since the beginning of May.  We had one weekly increase in inventory (week of 5/29), but the next week we dropped more than the previous increase.  Crude oil closed down on low volume.

The market does not know how to handle the inventory news.  Gasoline inventories continue to build, suggesting that buyers are disappearing at the present pump prices.  It could also be refiners taking advantage of hedging opportunities.  Buy crude now and sell gasoline on the futures market for delivery in August.

Gasoline inventory went up 3.9 million barrels; crude oil inventory went down 3.8 million barrels. Refiners will cut the price of gasoline to move it (unless it is hedged). This puts additional pressure on the refiners, as they will have to squeeze their crack spread (markup in refined products). This would probably not be a good time to own refiners. Valero (VLO), Tesoro (TSO) and Western Refining (WNR) are three that are suffering right now.

One year ago, crude inventory was 301.8 million barrels; present inventory is 353.9 million barrels. Keep in mind that this is down from over 370 million barrels of inventory just a couple of months ago. The inventory line is getting closer to last year’s levels. That is bullish, while there was demand destruction due to high prices last year; present prices are much lower and not to blame for lower use.

Most believe the economy is holding down use, which will increase as consumers gain confidence in their financial situation.  Present gasoline demand is about 200,000 barrels less per day than last year.  One other important fact, did you know we import over 10% of the gasoline that we use?  This acts as an anchor on our refiners prices.  Overseas refiners do not have the same environmental laws, work regulations, or safety requirements that our companies have.

One bearish fact out of the weekly report was that crude oil imports were up 247,000 barrels last week.  Imports had been moving down, in accordance with OPEC reduced production quotas.  If OPEC wants $80 oil it seems like a good bet to agree with them.  I do not like leaks in the dam of supply.

You may want to review the complete EIA report.  The summary page has a lot of good information.  Below are the two charts that demonstrate oil inventory and supply.

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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