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Dallas, TX
May 20, 2009, 08:00 EST |
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Dr. Joe Duarte's Market I.Q. |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Oil Prices Near A Major Move
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What's Hot Today: |
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U.S. stock futures were flat in early trading. Overnight Asia was mixed, Europe
was mixed. Oil was trading near $60.
Today's Economic Calendar:
- 10:30 a.m. Oil supply data released.
- 2:00 p.m.Apr Federal Reserve FOMC Minutes
News For Thought
Global GDP Expectations Collapse. Japan's latest GDP report showed a 4.2% contraction, with its yearly contraction rate at 15%. According to Stratfor.com: "Russian Economy Minister Elvira Nabiullina said May 19 that Russia’s gross domestic product (GDP) may contract “4 percent or 6 percent or 8 percent” this year, revising down a January forecast which estimated a 2.2 percent decline in GDP, Bloomberg Television in Moscow reported."
TARP payback won't be easy. Banks who took TARP money will have to wade through fine print to pay the money back. According to CNBC, citing anonymous sources: "no bank will be allowed to repay the TARP until after June 8, when 10 of the 19 biggest banks must present plans to boost their capital under the government's stress tests. The other nine banks were told they had adequate capital to survive a worsening of the recession. The government also won't allow any one bank to repay the TARP first but will approve them in batches."
The report added that banks will have to pass another stress test and "issue debt that isn't government guaranteed, demonstrate the ability to self-fund in the market and win the approval of their banking supervisor."
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Oil Prices Near A Major Move
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Is The Oil Sweet Spot Just Around The Corner?
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Crude oil (WTIC) has made its way to $60, as decreasing demand has been countered by decreasing production. Yet, as the summer driving season approaches, you get the feeling that falling supplies of crude and gasoline could lead to an accelerated supply crunch and higher prices.
Chart Courtesy of StockCharts.com
As a result, oil related investments have reached a point where the relationship between costs to the producers and the status of the supply and demand equation are nearing that sweet spot where everything is in fairly good balance and the potential for making money with just enough effort is quite favorable. According to The Wall Street Journal: "A long-awaited drop in the cost of drilling and maintaining wells has finally materialized, easing the pressure on oil and natural-gas producers whose profits are being squeezed by lower prices."
Among sevreral key factors that have benefited the industry are lower costs for steel, and lower demand for steel pipes used in building and repairing oil rigs. This has helped to reverse a situation where "margins were being hurt by the stubbornly high cost of materials, labor and drilling services needed to get oil and gas out of the ground."
Devon Energy (NYSE: DVN) told the Journal that "its costs have dropped 10% to 15% from the beginning of 2009 and predicted they will come down another 10% to 20% before the year is out." XTO Energy (NYSE: XTO) added that "drilling costs fell 15% to 20% in April alone."
According to The Journal: "Several factors are driving the cost declines, including the lower price of steel, which is used to make drilling pipe, and cheaper diesel fuel, which powers most drilling rigs. The biggest factor, however, is reduced demand for drilling equipment. Lower oil and gas prices have led producers to drastically cut back their drilling, more than halving the number of rigs operating in the U.S. since September."
With lower operating costs, and firming prices, oil producers, refiners, and retailers have an opportunity to make money if there is a spike in demand, which could come as early as the next few weeks when summer driving season kicks into high gear. AAA has projected a 3% increase in automobile driving for the summer. The American Petroleum Institute's latest figures, released on Tuesday after the market closed showed another reduction in gasoline and crude oil reserves for the U.S. The U.S. Energy Information Agency (EIA) data will be released this morning. The trend of both the API and EIA data has been quite similar over the last few weeks, and has led to a steady increase in the price of crude oil and gasoline.
Chart Courtesy of StockCharts.com
The oil service sector (OSX), although it has seen its margins decreased, is primed to profit from the current situation as its costs have been reduced, and the possibility for an increase in demand for its products and services is likely to rebound if supply shortages develop while demand remains steady or actually increases. OSX has been a fairly steady performer over the last few weeks, despite a reduction in earnings for companies like Schlumberger (NYSE: SLB).
Another way to play the current scenario is via the U.S. Gasoline ETF (NYSE: UGA), which holds gasoline futures. We have an open position in UGA (visit our energy section), that has been acting well of late.
Chart Courtesy of StockCharts.com
The way the data is shaping up, though, a turn in the oil market may be just beginning. According to The Journal, while "costs have fallen fastest in the U.S., where the decline in drilling activity has been steepest," there are signs of some kind of bottom forming as " slowdown in drilling is beginning to ease as costs fall and oil prices rise. Baker Hughes Inc. reported Friday there were 918 rigs active in the U.S., down by just 10 from the previous week, one of the smallest weekly declines this year. A few areas, such as the Haynesville Shale natural-gas field in northern Louisiana and parts of the oil-rich Permian Basin in West Texas, saw their rig counts rise slightly."
Conclusion
There are two ways of raising prices. One is to drive demand. The other is to cut supply. The oil market has always been about supply. And the steady decline in production over the last few months has led to a point where even a slight increase in demand, albeit temporary, could lead to a significant increase in prices.
We think we're near that inflection point and that the summer driving season is going to be the catalyst.
Crude oil prices have been rising steadily in expectations of such a set of developments. But, prices could move higher, and they could do so rather quickly. A move above $60 in the price of crude will likely entice those who have been on the side so far, and push prices toward $70 in a hurry.
Get Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for All Seasons. Also Available As Kindle Books.
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Market Moves - Stock Of The Day
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Amgen (Nasdaq: AMGN) Could Get A Pre-Conference Bounce
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Amgen (Nasdaq: AMGN) shares may perk up in the next couple of weeks, as the
promotional campaign for the company's appearance at the annual American Society
of Clinical Oncologists (ASCO) meeting gets in gear.
Chart Courtesy of StockCharts.com
Amgen has been under lots of pressure of late, as the threat of lower reimbursement for its drugs from Medicare and private insurers looms, along with generic competition always being a possibility.
This year the company continues to focus on its cancer portfolio and news releases suggest a mixed bag is in store. Amgen has lots of early research ongoing (phase I and phase II trials.) But its early press releases have been perfunctory at best, not giving any clues as to what's ahead.
That's just gamesmanship, though, as most companies will try to spin their data in as positive light as possible. What is interesting is the amount of data that Amgen will report, which suggests that its research pipeline is quite busy.
Amgen, aside from focusing on colorectal, pancreatic, and head and neck cancer at this conference, will also present data on the effects of its red blood cell and white blood cell generating drugs, and their effects on different scenarios with patients undergoing chemotherapy and other treatments for cancer.
The stock has made a bottom and is moving sideways. Of late, though, volume has been steadying, a sign of accumulation. There is price resistance at the 50-53.50 band. But a move above that could take the stock to 60. That's a nice short term trade, which could easily take place as the buzz toward ASCO takes hold. See our biotech section for an entry point on Amgen.
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