|
Petroleum Refining and Oil Prices: Is it Time to Dig into Oil and Energy Stocks?
Sam Subramanian PhD, MBA
Weakness in the U. S. dollar and hopes of an improving global economy have thus far pumped up the price of oil. Oil has nearly doubled
in price over the past three months.
While oil is taking its cue from the U. S. dollar on a day-to-day basis, the uptrend appears to be running
into resistance in recent trading sessions.
News of unrest in nations like Iraq and Nigeria has failed to spike oil prices. The reality of slack
product demand is seeping into the oil pits.
Product demand
Gasoline demand in the U. S., is nearly 6% lower than it was a year ago. According to the U. S. Department of Energy, gasoline inventories recently tallied 205 million barrels, following their biggest weekly increase.
The distillate picture is even more disconcerting. The deep recession has slowed industrial activity including freight transportation and taken a toll on diesel demand. Total U. S. demand for distillates is averaging nearly 3.4 million barrels per day, about 20% lower than year-ago levels.
Oil Price Forecast
In the near-term, gasoline demand in the U. S. should start to taper after the Fourth of July weekend. Beyond this seasonality, trends in disposable income will become a key factor driving gasoline demand. In distillates, diesel demand is likely to move in tandem with Gross Domestic Product while
heating oil demand will be driven by weather patterns particularly in the Northeast.
Looking outside the U. S., China and to a lesser extent Brazil and India are expected to contribute to global growth. Europe is mired in a deep recession and is widely expected to lag the U. S. in recovery. As such, the possibility of a synchronized global recovery that rapidly boosts oil demand appears remote. Led by a 4.9% decline in U. S. consumption, the International Energy Agency expects global oil demand to fall 2.9%.
Meanwhile, supplies of oil seem adequate. While OPEC countries appear to be generally disciplined in limiting shipments to around 28.0 million barrels per day, non-OPEC production is increasing. Russia's output appears to be higher than earlier estimates.
Against this backdrop of slack product demand and plentiful oil supplies, it is prudent to take a relatively conservative view on the outlook for the price of oil. This backdrop also has somber implications for refining and alternative energy shares.
Take Profits in Alternative Energy
The fortunes of alternative energy stocks like First Solar (FSLR) and ETFs like PowerShares WilderHill Clean Energy (PBW) are tied as much to the price of oil as investors' risk appetite.
Alternative energy stocks are unlikely to fare well if oil loses price momentum and upside is capped in the near-term. Given the healthy run-up in alternative energy shares in recent months, it is worthwhile to consider paring bets here.
Hold-off on Refiners
Slack distillate demand is causing refiners to curtail production when they should be building inventory ahead of the winter season. U. S. distillate inventories have climbed to 42 days of supply from nearly 28 days of supply a year-ago. The average price of diesel in the U. S. has fallen below that of gasoline for the first time since 2007.
Barring a major surge in demand, high distillate inventories are likely to act as a buffer and keep prices in check. It is prudent to take a wait-and-see posture on shares of refiners like Frontier Oil (FTO), Holly Corp. (HOC), Tesoro Corp. (TSO), and Valero Energy (VLO). If global growth surprises to the upside and product demand becomes more robust, such stocks can offer healthy potential for appreciation over the long-haul.
Sign up to receive profitable investing ideas & insights FREE!
Internal Sponsorship
The AlphaProfit Sector Newsletter's Core and Focus model portfolios are up 32.8% and 33.7%, respectively since March 9. The Core and Focus model portfolios were repositioned at yesterday's close.
Subscribe to the Newsletter and receive the current recommendations. As an added bonus, you will
receive domestic, foreign, and specialty mutual fund recommendations included in the NTF Growth portfolio. The NTF Growth portfolio is up even more than the Core and Focus model portfolios.
Protect & grow your wealth with
investment recommendations from free e-letter
AlphaProfit MoneyMatters
By Hulbert #1 rank winner Dr. Sam Subramanian
'Incisive Insights, Impressive Results' - Jim Woodruff
|
|
About AlphaProfit MoneyMatters and AlphaProfit
AlphaProfit MoneyMatters is a free e-letter distributed to registered users of AlphaProfit's website. The e-letter analyzes the economy, markets, and sectors and provides money-making insights on stocks, exchange-traded funds, and mutual funds.
AlphaProfit MoneyMatters is edited by Dr. Sam Subramanian acclaimed for his financial acumen and analytical skills.
AlphaProfit Investments, LLC is an independent investment research firm based in Sugar Land, TX. AlphaProfit publishes the AlphaProfit Sector
Investor's Newsletter, edited by Dr. Sam Subramanian. Leveraging sector funds, the Newsletter provides high-performance model portfolios
with Fidelity funds and exchange-traded funds.
It also includes actionable stock recommendations. This newsletter features among MarketWatch's top 10 investment newsletters and has won
the coveted #1 rank from Hulbert Financial
several times.
Copyright Policy and Fair Use Guide
You are welcome to quote a short excerpt of the article not exceeding 100 words with attribution in the form of a hyperlink to the article's
full URL or http://www.alphaprofit.com. If you wish to republish the article in full on
your website, blog, or other media, you must obtain permission.
AlphaProfit MoneyMatters™ is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual advice on investing. Factual material is obtained from sources believed
to be reliable and is provided without warranties of any kind. AlphaProfit Investments, LLC is not responsible for any errors or omissions. AlphaProfit Investments, LLC neither is associated with nor receives any compensation from any
of the investment companies, brokers or entities connected with the securities mentioned herein. Please review our Terms and Conditions of Use and Subscriber Agreement which is available on our website at
www.alphaprofit.com; they govern your relationship with AlphaProfit Investments, LLC, including, but not by way of limitation, use of the AlphaProfit MoneyMatters.
This page is best viewed in 1024 by 768 pixels screen resolution or higher.
Copyright © 2009 AlphaProfit Investments, LLC. All rights reserved.
|