Oil, Rising Inventory & Higher Prices
Research for Online Investors

by John Dalt

5/08/09

Crude Oil just keeps notching gains, up 3% today, anticipating an improving economy. Supply and Demand is not the driver, as the following two charts illustrate.  Inventory grew, but notice the little downtick on days of supply, it is one-tenth of a day less than the previous week.

As we have recounted here for the last few months, crude oil inventories keep building.  Last week’s build was the smallest in the last month, but do not forget the tankers that are rented, full of crude, sitting in the gulf.  There are estimated to be over 100 million barrels of crude on tankers stored to take advantage of the Contango in crude oil prices.  These will be delivered starting in June through January to fulfill futures contracts that have been sold.  The following is out of this week’s EIA report.

Falling Prices Lead to a Reduction in Domestic Oil and Gas Drilling

The oil and gas exploration and production business has seen its share of booms and busts over the years. But what exactly happens to drilling for new wells when prices go on a roller coaster ride? The last 16 months are a great example.

At the beginning of 2008, Baker Hughes reported that there were a total of 1774 oil and gas drilling rigs operating in the United States, of which 18 percent were drilling for oil (316 rigs). This rig count represented a continuation of fairly high and stable drilling levels going back to 2006.

With oil and gas prices increasing rapidly in the first half of 2008, rig counts also rose. Since drilling involves physical and financial commitments that cannot change instantly, the total rig count continued to rise even after prices began to fall in July, reaching a peak of 2031 rigs in mid-September. Drilling rigs dedicated to oil rose for slightly longer, peaking at 442 in early November.

Once rig activity began to fall, it fell rapidly. For the latest available week (May 1), the total rig count for oil and gas stood at 945, down 53 percent from the peak. This is the lowest level since March 2003. For oil drilling alone, the count of drilling rigs fell to 196 for the latest week (a 56 percent decline from the peak).

Does a reduction in the rig count mean a proportional change in production from new oil and gas wells? Not necessarily. As the number of new wells falls, the production per well tends to rise. Operators focus on the most potentially profitable parts of their prospect portfolios, which means not drilling prospects with very high costs or lower expected production rates. As a result, production from new wells would normally fall more slowly than the decline in the rig count.

I  told my dad a year ago, that he would see $150 oil maybe even $200 a barrel.  He is 89 years old, and thought I was nuts.  We made it to $147 last summer.  I stand by my prediction.  You can profit from the rising crude oil prices with the USO or DXO etf.  Be careful, the market can punish as well as reward.

Non-Farm payrolls fell in April by 539,000 according to the Labor Department.  There are now 13.7 million people unemployed in the U.S., an all time high.  The rate now stands at 8.9%  March was revised up to 599,000

The banks that want to pay back their TARP funds are finding it harder to get the government out of their business than it was to get them in.  The Treasury requires that they drop FDIC insurance for issuing new debt.  Treasury will weigh the banks “overall soundness, capital adequacy, ability to lend” and their “capital must be consistent with stress test buffer” requirements.  Hugo Chavez, President of Venezuela, announced today he is going to nationalize up to 60 energy company operations in his country.  Banks and energy companies, all have to learn.  Like Ronald Reagan said, “The nine most terrifying words in the English language, I’m from the government and I am here to help.”

Nassim Nicholas Taleb, author of “The Black Swan” and professor of risk engineering at NYU, told a conference in Singapore, “that gold and copper may rally massively”.  This is a result of inflation from governments printing more money.  Taleb predicted gold, copper and other assets “that China will like” are the best investments as currencies face pressure. Bank of America organized the conference.   Bloomberg has an article on the Global Crisis.  Taleb gained notoriety since he published his book about rare and unforeseen events.  His book came out in 2007, just before the sub-prime crisis created a global meltdown.

Have a great weekend.

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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