Crude Oil in Flux
Research for Online Investors

by John Dalt

5/06/11

Oil, gold and silver are all looking to bounce today after a jolting sell-off in most commodities.  Private Non-Farm payroll numbers came in better this morning than expected.  It appears more people have decided to look for work though as the unemployment rate jumped to 9.0% from the previous reading of 8.8%

Crude oil and silver were hammered yesterday.  Silver had started down on Monday after hitting highs last week and new margin requirements were instituted.  Crude oil started looking lower on Tuesday and accelerated on Wednesday when U.S. supplies grew more than expected.

Crude oil stocks grew 3.4 million barrels last week, gasoline stocks dropped 1.1 million barrels and distillate stocks (diesel) fell 1.4 million barrels.

Traders and hedgers see U.S. inventories are at the very top of the blue five year average range. Prices have moved higher than previous years on the ‘terror’ premium because of unrest in the Middle East.

Crude oil inventory is 25 to 30 million barrels higher than a ‘comfort’ level based on historical standards, which represents two days of refinery inputs.

The U.S. Energy Information Agency (EIA) gave a breakdown of where U.S. oil imports come from.  Canada is our number one supplier at 2.5 million barrels per day.  This represents 22% of total U.S. crude oil imports and comes primarily from the tar sands of Western Canada.

Mexico supplies the U.S. with about half of Canada’s amount at 1.28 million barrels per day.  Our observation about the top five suppliers to the U.S. crude oil market:

• Canada---The U.S. State Department is holding up a pipeline project to bring Canadian oil to the U.S.
• Mexico--- oil production is depleting faster than they are replacing it.  Mexico will become a net oil importer within five years if they do not re-invest oil profits in exploration and production.
• Saudi Arabia---They have been lying about their reserves for the past 40 years.  They have much less spare capacity than represented.
• Nigeria---Subject to interruptions because of rebels.
• Venezuela—Hugo Chavez would rather eat dirt than sell to the U.S. devils.  China has signed long term supply contracts.  They will pay a premium for guaranteed supply as the market tightens.

Representing 60% of total U.S. crude oil imports in 2010, the only friendly stable supplier is Canada.  Is there any doubt gasoline will cost more in the future?

This morning, the Labor Department reported that nonfarm payrolls (jobs) increased in April for an eighth consecutive monthly gain. Today's chart shows how the number of jobs steadily increased from 1961 to 2001 (top chart). During the last economic recovery (from the end of 2001 to the end of 2007), job growth was unable to get back up to its long-term trend for first time since 1961. Beginning in 2008, nonfarm payrolls have pulled away from the 40-year trend (1961-2001) by a record percentage. Notice that the current number of US jobs was first reached in early 2000.

Chart courtesy of http://www.chartoftheday.com

I have avoided commenting on the political/military events of last Sunday, but came across this ‘poster’ to share.  This morning, Al Qaeda confirmed that Osama Bin Laden was killed.  President Bush declined a trip to Ground Zero on Thursday.  He continues to demonstrate his inner peace with being a ‘Past President’ that did his job.

The mailbag:
You have helped lift my confidence in the market once again. I think I am just going to look at only your trade instructions and stop listening to anything else. It will be a lot easier on me!---paid up subscriber G.C.

John’s reply:  It is important not to get too excited.  A good plan will always win over bouncing from one headline trade to the next.   Remember, the TV talking heads are trying to make news, the more dramatic the better.

Do you think the Obama administration will investigate the ‘oil speculators’ that caused oil to drop $10 per barrel?---paid up subscriber T.M. (alias Tung N. Cheek)

John’s reply: Do not hold your breath.  It works both ways!  Maybe they can apply for a stimulus payment.

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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