Oil to hit $115 this afternoon?... If so… a new record high… and STILL a fantastic buy.
A big thank-you to the refiners as they look set to push the shares I’m tipping into orbit.
The press was full of nonsense on Monday about the G7 saving the plunging dollar. It did make me laugh. Do I believe that a bunch of men in suits can prevent the inevitable? No I don’t.
Anyway, sense has prevailed… the dollar is falling as it should… and commodities are again on the rise. Gold is sitting at $934, with coffee rising 25 cents to $136.75 and copper up 2 cents to $338.0.
I guess I am just getting blasé about all the new records we keep hitting. We had yet another all-time high overnight, as WTI futures hit 114.08.
I reckon we might just get another record above $115 later today should US gasoline inventories slide significantly (which I expect them to do).
In the week ending 11 April, crude oil Inventories are expected to rise 1,800k barrels and gasoline is expected to fall 1,800k barrels.
If there is a fall in capacity utilisation at refineries and a larger-than-expected fall in gasoline stocks, I expect oil will hit a new record for a third consecutive day.
This morning, the futures strip price, which is the average price of all WTI futures contracts for the next 12 months, stands at $110.30 and WTI Cushing 3-2-1 crack spreads remained well below $10.
So, all of this reinforces my view that oil refineries are not great stand-alone businesses at the moment. The futures strip price is stubbornly high – and I expect it will remain so – and crack spreads will be put under pressure because of this.
So stay away from refiners
Indeed, I am starting to wonder whether the refining industry will EVER be a good investment in the future. After all, isn’t this why no refinery has been built in the US since the 1970s? It does not make economic sense. There may have been a four-year gravy train at the start of the century, but there isn’t another locomotive anywhere in sight.
According to research by UK energy consultancy KBC, global refining margins may come under pressure for five years, beginning 2010, as capacity addition is likely to surpass demand.
“The amount of capacity coming on stream is likely to result in an excess of refining capacity over demand at least till 2015… Utilisation for the industry is expected to come down from the current 95% to 85% as the capacity expansion surpasses demand.”
The research is interesting, but did not deal with the obvious issue that refining margins are under pressure NOW. What’s going to happen between now and 2010?
The only way that refiners will become a solid buy in the next year or so is the oil price falls substantially. I do not expect it to do so… neither does the futures market. This implies tight crack spreads for some time – and poor profits at refiners.
Indeed, another factor supportive of the oil price is the arrival of Peak Oil in Western Siberia.
Leonid Fedun, the 52-year-old vice-president of Lukoil, Russia’s largest independent oil company, told the Financial Times he believed last year’s Russian oil production of about 10m barrels a day was the highest he would see “in his lifetime”.
I’ll reveal the best way to play the current oil market at the end of this piece.
Uranium falls – still the right time to buy
Astonishingly, weak demand from utilities has seen the uranium price fall even further. The spot uranium is at $68 per pound, according to Ux Consulting (UxC), down from $71 last week. I am reassured, however, by the long-term price which remains unmoved at $96.
The uranium price is sat at the same level as at the end of 2006. I believe it will go higher. The number of companies that keep on cutting production forecasts is increasing and the number of reactors being planned is increasing.
Canada’s Denison Mining has said that uranium output this year would be 1.4-1.7 million pounds, less than a November forecast of 1.7-2.1 million pounds… Uranium One recently lowered its forecast for the year by 32%. This was the second reduction by the company in six months.
Paladin Resources also delayed commissioning its Kayelekera Uranium project in Malawi until March 2009 instead of December 2008. Anglogold Ashanti has served notice of a potential force majeure on its South African uranium business… it’s that pesky power crisis again.
This morning, EU energy commissioner Andris Piebalgs said nuclear power is an important part of the EU’s future energy policy. He was speaking at the European Nuclear Assembly, a conference being held in Brussels, where politicians and industry experts from around the world have a chance to share the latest developments in the nuclear field.
"I believe that nuclear energy is part of the new energy mix of the European Union and will remain so. It will definitely help to address the three goals that we are always talking about: not only sustainability, not only less CO2, but it will also help with the security of supply," he said.
Every production cut by a miner adds to the bull message surrounding the price. Every new reactor announcement does the same.
Also in the news…
• Tightness in copper and iron ore..? Rio Tinto reported a drop in production of steelmaking coal, copper, diamonds, zinc and lead this morning. First-quarter coking coal output fell 27% after weather disrupted supplies and mined copper dropped 6%.
• Investors banking on gold rebounding above $1,000 any time soon may be disappointed, according to a Citigroup Global Markets report. However, it said that forces that have propelled gold for the past five years are intact, if not intensifying. Citigroup would not be surprised to see gold double from current levels, over time. It’s just a shame the report didn’t quantify exactly how long it meant by “over time.”
• Israel is 350 million cubic meters of water short of supplying expected demand over the coming year, without seriously endangering the quality of its water reserves, according to newspaper Haaretz.
Recommended oil plays
The only way to sensibly play the oil market at the moment is via the integrated companies and not the refiners – unless you think the oil price will collapse… and I haven’t met one of those comedians for a while now.
Sounds like common sense right? But which integrated oil company should you be going for? There’s a lot of them – they all appear to be great value… but take my word when I tell you that there’s a few red herrings amongst them.
In my opinion there’s only one that you should have your money in… click here now to discover what it is.
Regards
Garry White
Editor
Smart Commodities UK
PS
Click here now and I’ll also reveal a stunning uranium play that you should have in your portfolio right now…
