Crude Oil Trade
Research for Online Investors

by John Dalt

1/21/11

What happened to crude oil last week?  The price was hovering above $90 a barrel as inventories had been moving lower in the last three months.  This fit nicely with the market's perception that the economy was improving.  As the economy improves energy usage increases.  Society needs energy to manufacture things, to heat office buildings, to transport goods to warehouses and on to sales floors across the country.  To move imported items to markets, and export items to the port requires energy in the form of transportation fuels.

As our economy showed increasing activity it was confirmation to see inventories of crude oil decrease as demand increased in the U.S. and abroad.  So, what happened in Crude oil inventory last week?  Crude oil inventory increased…a lot.  There was 2.6 million barrels of black crude more on hand last week than the week before.  More crude was on hand than since before Christmas.

The first thing you think about on this kind of a build is to look at imports and derivative inventories.  Did imports increase?  No, and domestic production was actually 50 thousand barrels less than the week before.

Surely you think, there must have been a shrinkage of gasoline and distillate (diesel) inventories.  Gasoline inventories actually increased even more than crude oil inventories.  Gasoline inventories rose 4.5 million barrels.  Distillate inventories were up one million barrels.  That might explain why refinery inputs were down 400 thousand barrels, their storage is full.

All this brings us back to our question; why did the crude oil inventory build last week?  Cold weather.  Transportation in many areas came to a halt.  This was one of the winter’s first strong storms covering much of the U.S.  Drivers cancelled trips they didn’t have to make.  Churches and schools closed.  School buses and semi tractor-trailer rigs were parked.

Why take the risk?  We don’t need to wreck a vehicle to do today what can be done tomorrow.  Sometimes the most difficult questions can have the very simplest answer.  The chart below shows crude oil inventory.  The red dotted line is this year plotted over the blue average range.

Last week’s weather related build in inventory saved a plunge into the ‘Average Range.”  As usage comes back into normal, you may want to look at a trading position in USO, before the report comes out next Wednesday.  We see the current inventory levels (red line) moving into and to the lower side of the average inventory range.

This trade is gives us the best of both worlds.  It is a bit contrarian, as crude oil is down today…so you are betting against the market.  But if you believe the “trend is your friend,” the trend wants to carry crude oil over $100.  We believe that will happen, and it probably won’t stop there.

World-wide, there are other concerns.  Will China be successful slowing their economy?  How about S. Korea?  These countries are raising interest rates or bank reserve ratios to restrict access to loans.  The oil market considers energy usage world-wide, as crude oil can be easily transported where the demand exists.

Good trading.

Quote:
 It is incumbent on every generation to pay its own debts as it goes.  A principle which if acted on would save one-half the wars of the world.---Thomas Jefferson

Editor’s note:  We hear rumors the Tea Party house members want a two-thirds majority vote requirement on tax increases and balanced budget targets attached to any increase in the debt ceiling.  Good for them, but I fear it is too little, too late.

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.

MarketToday Archive

Back to Top