Crude Oil - Short Term

My Short Term view of Crude Oil is built around observations on the daily price chart going back several months.

This week Crude traded in a consolidation range as traders seemingly grew comfortable with the situation in Israel.

Technically, what I find interesting on the above chart is the wedge type pattern I have traced out in green. Price action is now in the apex of this wedge and a breakout one way or the other is to be expected. At the close of trading this week price action leaked out the bottom of this wedge. Monday will tell the rest of the story. RSI is below the “50” mark which tells me momentum is waning a bit. We may see a short term pause in the Oil markets for a while here.

For now, at least, the prospect of other nations being dragged into this conflict has diminished despite lots of tough talk. But, this does not mean that the conflict is about to go away. Israel is readying 30,000 more reservists just in case the situation gets worse. The Israeli ambassador to the UN this week said Israel's objective is to turn Hezbollah villages into sandboxes and render Hezbollah ineffective. Al Que'ada weighed into the equation this week with a call to its followers to rise up and kill more Jews.

This week I was pleased to hear from a gentleman in my local Rotary Club. Turns out he has a daughter in Beirut working in the diplomatic corps. Her description of the situation was enlightening indeed. She says Lebanon is actually run by a coalition of Christians, Sunni Muslims and Shi'ite Muslims. Hezbollah following the turmoil in the 1980's and 1990's helped create order and restore infrastructure in many rural areas of Lebanon. Hence, Hezbollah continues to be supported philosophically by a goodly number of Lebanese citizens and also by many in the military. Her conclusion and synopsis is that things cannot get better any time soon with a convoluted coalition running the country and with so may people philosophically attached to Hezbollah. She says she sees no immediate end to the unrest and conflict.

Based on this unsettling first hand account of the situation, I say we see things intensify. I say it is only matter of time before we see other nations dragged into the fray. I say higher Oil prices are just around the corner as fear levels get ratcheted up a few more notches. Get ready for it. Use any near term weakness in Crude and in energy equities to position yourself for what could be an upward surprise.

Oil Inventories

For the week, inventory data shows that Crude Oil stocks remained unchanged at 335 million barrels in storage. This leaves us comfortably above the 5 year average of 321 million barrels. No doubt another reason why Crude was muted this week.

Iraq - The Quagmire Deepens

There are 2 opposing forces at work in Iraq - the drive for security and the quest for prosperity. Iraq sits upon the world's 3rd largest reserves of petroleum and re-establishing a flow of oil to global markets would go a long way toward improving the Iraqi economy and perhaps calming the Sunni / Shi'ite tensions. For a while during the month of June it looked as though Iraq was well on its way to being able to supply oil to the global markets. But a wave of sabotage has now left the key pipeline to the nation's largest refinery riddled with bullet holes. So, the violence continues and the prospects for social order remain dim at best. Will there ever be a resolution to this mess ?

Gasoline - More Problems...

This week it was announced that Venuzuela's giant 635,000 barrel a day Amuay refinery, a major supplier of gasoline to the US, will be shuttered for up to 8 months. Details are sketchy right now, but it is known that a fire is the root cause of the shutdown. With gasoline at $3.00 and more at the pumps, this is the last thing the market needs right now. Also, Valero is taking several days of maintenance downtime at a Lake Charles, Louisiana refinery and also at its Memphis, Tennessee location.

But, these problems seemingly did not bother the markets this week. Gasoline production remains well above average and traders are assuming that the refiners can compensate for the Venezuelan situation and the outages at the Valero locations. The above chart has the distinct look of a very small head and shoulders formation. Dare I say it....could it well be.... that despite all the media flare over high gasoline prices we may have seen the top ? Let's see what the next few days have to bring.

Natural Gas - Short Term

My Short Term view of Nat. Gas is built around observations on the daily price chart going back a few months.

Storage data this week shows that we decreased the amount of gas in storage by 7Bcf to 2756 Bcf on the back of the hot weather that continues to hold much of the US in its grip. If this momentum is to continue, the next technical threshold to be crossed would have to be $7.80 basis the September futures contract. The following chart, courtesy of www.weather.com shows that the hot weather is still in place. So, there is every reason for us to keep going.

But, playing the devil's advocate and looking forward a bit, I have some concerns. With Summer now more than half over and with no Hurricanes having impacted the Gulf region so far, one must start to consider the prospect of going into the September/October time frame with a huge amount of Natural Gas in storage. Prices could again get soft. I therefore remain cautiously friendly to the Natural Gas market from here. The following chart, again courtesy of www.weather.com illustrates my concerns. Temperatures are starting to cool in the northwest. Are the dog days of summer drawing to a close?

Heavy Oil Extraction - a Revolution in the Making?

Heavy oil deposits around the world share only one characteristic: they are challenging to produce. Every reservoir requires a different set of technologies and methodologies to overcome the oil extraction challenges in a cost effective way.

To date the steam injection method (SAGD) has been predominantly used to extract heavy oil. As the name implies, steam is injected into the geological formation. The heat softens the heavy oil deposit and encourages better flow characteristics. Other technical approaches include solvent injection and fire flooding. Solvent injection as the name implies involves using a hydrocarbon solvent to soften the heavy oil deposit and encourage flow. Fire flooding involves drilling a vertical well and igniting the heavy oil deposit to soften it and promote flow.

And herein lies the potential problems. Solvents are messy and potentially environmentally unfriendly to handle. Vertical well fire flooding is not applicable to all types of heavy oil deposits and exhibits less than desirable extraction economics at best. Steam requires water and heat. Water is a tenuous issue in many oil producing areas both from an availability standpoint and from a contamination perspective. Creating steam requires energy inputs. Burning energy to recover energy can be economically questionable.

Several years ago Petrobank Energy ( TSX:PBG) recognized these problem issues and also correctly recognized the importance of heavy oil deposits in meeting future global energy demand. The brilliant engineering minds at Petrobank patented a revolutionary new technology called THAI (toe to heel air injection) in Canada, the US and Venezuela. THAI involves drilling pairs of wells (one horizontal and one vertical) into the heavy oil deposit. The horizontal well is at a greater depth than the vertical well. Without going into complex engineering details, what happens next is air is injected into the vertical well and the heavy oil deposit is actually started on fire. The combustion progresses from the toe of the horizontal well to the heel, hence the acronym THAI. The resulting heat softens the oil formation and the oil then is pumped out of the ground via the horizontal well.

The following diagram better illustrates the concept of THAI:

Several days ago, Petrobank initiated a THAI process in real time at its Whitesands Project in Alberta, Canada. In a matter of a couple weeks we should know the engineering outcome of this trial effort. If it is deemed a success, Petrobank will be in a position to revolutionize heavy oil extraction literally around the world. The revenues from just licensing the patented THAI process could in themselves prove huge not to mention the revenues from extracting heavy oil from Petrobank's own heavy oil leases. Keep your eyes on Petrobank (TSX:PBG). As I show in this week's Technically Speaking, Petrobank broke out this week on excellent volumes. There are evidently a number of large market players banking on the success of THAI.

Alternative Energy - A Continued Look

This week, I continue my look at alternative energy type stocks with emphasis on ethanol. I look at one development stage firm that plans to produce ethanol, another firm that markets ethanol in the western US and a company that produces biological enzymes that are used in the ethanol fermentation process. My examination of alternative energy has turned out to be rather timely. Lawmakers in the House of Representatives have put together 2 energy bills that have a tie to alternative energy. Republicans are focused on legislation to open the Arctic National Wildlife Refuge to drilling. Government royalties derived from drilling would be used to provide tax credits to companies seeking to build plants to make liquid fuels derived from grains, cellulose or coal. Tax incentives for solar energy would also be extended under this legislation. A Democratic piece of legislation meanwhile, calls for spending billions of dollars over 10 years to develop a national ethanol distribution system. Whatever the outcome, it appears that alternative fuels are on the agenda in Washington. The way I look at it, this is a good thing and traders and investors should take note.