Here's a column delivering less of an actionable plan than an overview of "facts on the ground" for oil. Make of them what you will, but for me, the mixed bag has left few really strong ideas to pass on today from the oil patch.
First to refining, where demand is indeed going up. Intuition would suggest a greater appetite for gas when prices are low, of course, and we're not being disappointed at the start of the summer driving season. A solid 2.9 million-barrel draw early last week continued the trend of a demand increase of about 2.5% in gasoline over the five-year average. This is most applicable here in the U.S., where we are going to benefit most from dollar-denominated crude and therefore products. All of this feeds into widening crack spreads and would point toward investing in the refiners, if I didn't believe that they're all so damn frothy already. Still, as a marker in a rather un-investable oil space, I'll stick with Marathon Pete (MPC) and Phillips 66 (PSX).
Production, despite increasing demand globally, is doing more than keeping pace. We already know about the OPEC nations and their continuing market share free-for-all, courtesy of the non-quota "quota" of 30 million barrels a day from their Vienna meeting two weeks ago. Add to that the increasing production from Libya now coming back on line and the possibility of more Iranian barrels, dependent upon nuclear negotiations later this month, and you'll far outstrip whatever new demand is being developed (IEA has estimates close to 94 million barrels a day for 2015 (!))
If there is a U.S. player that will fare better than others in this market share scramble, it would have to be among the independents in the Bakken. Production there has shown some weakness with the marginal players, even if it steadies elsewhere. The basis differentials that are so arcane to us but mean so much to these producers are starting to actually look quite favorable, as I outlined in my previous column last Thursday.
This will lead you to names like Continental Resources (CLR), Whiting Petroleum (WLL), and my personal best of the rest, Hess (HES). I truly think there is finally some value in Bakken oil stocks after a long drought -- although you shouldn't expect instant success.
And that's because the oil market itself is probably again going to be under siege. Don't discount the recent weakness in U.S. equities themselves as a catalyst for lower oil prices. It's not been the airtight correlation it might have been in the past, but it's always been difficult for oil to rally when stocks are not, and they look less likely to show enormous strength in the middle of the latest euro crisis.
Plus, there has been a weakening of speculative long positions in the last week, according to the CFTC Commitment of Traders report for June 9. Net long positions fell by 3.7% for the week, hitting a five-month low. Apparently, I'm not the only one who thinks that the production frenzy will have an impact on price again soon.
It would be tough to buy oil stocks of any kind if you believed that oil itself was headed back towards $50 a barrel, therefore my weakness of conviction in writing this column. Still, despite all the fundamentals, oil has shown some terrific resilience -- bouncing almost every time it nears $57 -- and that's the level I'll watch this week.
For me, that level will be the strike point for a few shares of some Bakken players -- but just a few.