Dennis Mangan, logi Energy, October 23

Crude Oil:

This week we again saw a rally of $1.97, closing at $80.50. We now have a BUY SIGNAL and should commence hedging. Considering the Crack Spreads, the best place to Hedge is in the Crude Oil. The Indicators changed direction and triggered a Buy Signal. Fundamentally, I am still negative view on the market but I never let my bias about market fundamentals stop me from following the mathematics of the market.

Too many times, I have seen the Indicators be right, and to ignore them is foolish. The market has changed to a bullish scenario after it could not break. The only reason I can clearly see is the weakness in the US $. As long as that continues the market probably cannot break dramatically. When, or if, the US $ strengthens the market should go back down and sharply. A break into the low $70’s, or high $60’s, is probable if we see the $ begin to rally. On the other hand, if dollar weakness continues to be the story we will see higher prices until the weakness finally reverses.

This week product prices rose causing the Gas Crack and 3:2:1 Crack to move higher. The 3:2:1 Crack Spread is above the breakeven price for refineries and this will support the Crude Oil as long as we hold here or higher. Crude Oil will be susceptible to price weakness if the Crack Spreads fail. The Heat Crack Spread dropped 9.82 cpg or 38% over the last 10 weeks as the Gas Crack dropped 27.02 cpg or 68% over the last 12 weeks. The 3:2:1 Crack lost 60% of its value in 10 weeks.

We may be low enough for now on the Crack Spreads but this will be determined by watching inventory and demand. The refiners are about at margins that are breakeven after 5 weeks of losing margins. A number of Refiners have shut down some operations but unless the spreads stay here or higher more will also have to go down. The break started the first week of August and they were making a profit of $7-$8 a barrel, now they are at breakeven and with a huge build up in inventory. Weakness from here in the Crack Spread should signal weakness in Crude Oil. If the 3:2:1 Crack Spread weakens Crude Oil could break severely. We have a lot of Distillate in Inventory and we have too little demand as of now. If we have a mild winter and the Crack Spreads collapse, Crude prices can go back down to $34. A cold winter with increasing demand and better margins will prevent that.

The Vol Price Indicator is at the top of its range for the 7^th week in a row, this is bullish. The % Total Count is 80%, rising and this is bullish. The other two Indicators are at 77% and 76%, both rising and this is bullish.

Heating Oil:

We jumped again this week closing at 207.56 cpg up 4.59 cpg. Heating Oil has showed strength over last 4 weeks. This week we generated a BUY SIGNAL but because of the HO Crack spread, we will use Crude Oil for the hedge. Fundamentally, I expect weakness to return, but as of now, the market looks strong. Currently the inventory is huge and demand is small. The Production levels remain too high versus the current demand. Frankly, the demand is simply pathetic. We have inventory 46 million barrels higher than a year ago. Demand remains in the lower 20% of the 10-year range for the last 27 weeks in a row, with production above the 50^th Percentile for 24 of the last 27 weeks. Eventually we will see a price problem and a large one if it does not change. Again this may not happen if the US $ remains weak. The facts and the price action continue not to agree, and there is no reason to argue with the price. The fundamental facts appear to be overwhelming negative, yet the price has been going up. The Crack Spread weakened this week but not by much. It must hold these levels, or go higher, or price problems will eventually develop. It all boils down to too much inventory, too much production and too little demand for finished product. This holds true if the US $ recovers more weakness will negate the facts for a while but probably not forever. I cannot see how weakness will not return in the weeks ahead but for now, we will not bet on it. Over the last 62 weeks, we have had only 4 weeks of year over year increases in usage. If Econ 101 is still valid, moving product will ultimately mean a price decrease. That is fine unless this is all the demand that there is. The only way to drop inventory may be a production cut, and a combination of the two will probably be the answer. At some point, it will become clear that if demand does not increase, with production dropping, we will simply not clear this huge inventory. If that plays out, we should expect a price collapse in the Heating Oil and in the HO Crack Spread. If that should happen, expect a decline of 50-75 cpg in Heating Oil and 15-20 cpg in the HO Crack Spread. Remember that this market ran up from 115 to 207 cpg and at the same time inventory built from 145 mm barrels to the all time record highs over 171 mm barrels. Thus, based on those facts, and terrible demand as of now, we can fall right back to where it began. We now have 25+ million barrels in inventory and we are up 92 cpg. If the demand function remains depressed, price will ultimately have a hard time maintaining these levels. When price does turn over the break could be very quick and very large. The Vol Price Indicator is at the top of its range for the 6^th week in a row, this is bullish. The % Total Count is 75%, rising and this is bullish. The other two Indicators are at 73% and 74%, one stable and one falling and this is neutral to bullish.

Tags: BlackGold, COMMODITY, ENERGY, GAS, LOGI, OIL, OIL PRICES, PEAK OIL

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September 23, 2009

Crude Oil:  This week we closed up $2.75 at $72.04. We have a Sell Signal as of now. The market has not been able to take out $75. Until it can take out $75, we should maintain a negative view on the market. It should have advanced to new highs in the upper $70’s, or low the $80’s, but it failed to do that. Upside momentum ran 26 weeks but has now turned negative and this bull market look to be over. As this market in Crude Oil stalled and broke the product prices have fallen more and that has caused the Crack Spreads to decrease dramatically. Crack Spreads ultimately determine the price for Crude Oil. With the Cracks now down at low levels the price picture for Crude Oil is poor. The Heat Crack, over 4 weeks, fell 68% from 25.81 to a low of 8.10 cpg and remains 3.17 cpg from the low. This is a very bad sign as we begin Heating Oil season. The Gas Crack has fallen 72% from its high of 36.22 cpg from 4 weeks ago. With the Crack Spreads weakening to this degree, and to these levels, we should expect the bid for Crude to weaken also. When the Crack Spreads break this much, and this quickly, what normally happens is that Crude Oil is very susceptible to price weakness. This is a bad scenario for the bulls to have to look at. Heating Oil must gain strength right now, with Gas season over, or the price for Crude can break sharply on any problems. If the HO Crack does not gain strength, the Crude Oil market will weaken and it can weaken very sharply on any more losses in the Crack Spreads. If this is a bear market, we will break under $67.50 and that will set up a test of the $59.52 swing low. If prices then fall below $59.52, we should head down to the $45 area or lower. There is a reasonable possibility, under certain circumstances, that we will test the lows at the $34 level. If this happens, the probable caused will be a mild winter. This will cause distillate demand to be unable to increase, by any significant amount, as Gas demand also drops. If this happens, product prices will probably decline more than Crude prices. Then the Crack Spreads will then collapse down to very low levels, probably down to the 0-5 cpg range or lower. That could cause the 3:2:1 Crack Spread to head down to 1.50 cpg, the all time low. That then will put Crude Oil at great risk of going into a total collapse mode. The refiners will drop the Crude Oil bids sharply and quickly to try to offset the price decreases in the products. It takes right around $5.00 a barrel, (12.50 cpg) to run a refinery at breakeven. The current margin on the 3:2:1 Crack is now 11.72 cpg, just about breakeven. Thus, Crude Oil is very vulnerable to any declines in the products. If the products start to break then the refiners must drop their bids quickly to maintain a breakeven at current rates. This can then cause us to enter a price scenario that is a race to the bottom. If products weaken sharply so will Crude Oil. Major weakness in price will pop up if demand does not improve for the products. Crude Oil inventory is 41,047,000 million barrels above last year. If we continue to process at the current high rate, we will have more than ample supplies. Currently we are exchanging Crude inventory for product inventory and creating a super glut. We have a huge shortage of demand, especially in Distillate. The Crack Spreads have collapsed, but production has not. We need the refining run rate down to 75%, this week it was 86.94%.

Tags: BlackGold, GAS, OIL, OIL PRICES, oil trading, peak

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Welcome to Black Gold the HedgeCo blog site about Energy and investing operated by logi Energy.  logi Energy is an investment management team that invests in the oil and gas sector in equities, options, futures, as well as on and off shore oil and gas fields and wells.  In this premier post, I’d like to tell you who we are and what we believe.  In other posts, other team members from logi Energy will provide detail and clarity to my mere words.  The basis of our investment approach is that peak oil has occurred in the world.  The world will never produce as much oil as it did in 2008 – ever again -.  Exploration has been conducted for over 130 years and every jungle, every desert, every mountain range, every rolling plain and every ocean site with potential to produce has been reviewed to identify where oil is.  As we look back at what the world has found over the decades, we now know that we’ve never found as much oil as we did in the 1960s.  Every decade since, we have discovered less and less oil. We are on track this decade to discover approximately 20% of what was discovered in the 1960s.  Today we use technology so sophisticated, it takes a PhD to refine the mathematics of the software processing the imagery. Complex engineering and deep mathematics are a hallmark of the oil industry.  Long gone are the days when geologists would lick the rocks taken from wells to identify pay zones for oil and gas.  We have technologies for finding, drilling, producing and improving oil production that allow us to very quickly identify opportunities and exploit them at a rate faster than we’ve ever been able to do.  Field after field, major region after major region, we have been applying these technologies to stretch out production well beyond original predictions.  These days our predictions are getting better and we are finding that even with the best of technology and nearly unlimited funding, we can’t stop major regions from peaking.  The latest unconstrained use of technology and money was the North Sea.  With no limitations in drilling or technology, it peaked in 1999 and today produces 70% of what it produced just 10 years ago.  The world is using oil at prolific rates.  Today we use six times the oil we used in 1950.  It is the most magical fluid in the world. One gallon of gasoline has the energy content of a man week of hard labor. Don’t believe me?  Assuming you get 32 miles per gallon on the highway like I do, how long would it take you to push your car 32 miles? A week? Longer?  Even more difficult, where could you get a week of hard labor for $2.85?  You can’t get that anywhere in the world.  The Egyptians used slaves to build their pyramids; the modern world uses liquid hydrocarbons. Some of us use our oil in more efficient ways than others. For the last 5 years, the third world citizen driving their moped has been impervious to price changes that have caused the economies of the OECD to cave in.  The summer of 2008 was the first of many price oscillations we will experience in the post Peak Oil world.  Prices will ascend until people can no longer afford the commodity, the demand dries up and prices drop letting the market rush back to the lower prices.  If it behaves like most other limited commodities, we can expect these oscillations to continue until the world transitions to other forms of energy for transportation.  Now knowing why and when the oscillations occur is our full time effort.  Check out our website at www.logipeakoil.com or contact us for details on how we do this.

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