If you're at least dabbling in shares of energy producers from ExxonMobil (NYSE: XOM ) on down -- and perhaps even including the three-ring circus that is Chesapeake Energy (NYSE: CHK ) -- you might have broken into a victory dance as crude prices rocketed higher on Friday.
Then, as we moved into the first week in July, the continuation of crude's northerly surge may have you substituting head scratching for Friday's more ebullient antics. Why have world crude prices taken off like so many scalded dogs? Is the veritable pop being overdone? Can it continue? Will it continue?
From my rarely tentative perspective, I'm comfortable with black gold's most recent direction, since I think the 2012 slide has itself been excessive for reasons that can be tied to both domestic and international circumstances. Nevertheless, as the late Ray Charles could have seen, the magnitude of the jump can't, and won't, continue unabated. Indeed, it doesn't require any real prescience to forecast something of a pullback during this week.
Domestically, you've likely noted that, to use the common vernacular, we're awash in oil. For starters, our domestic inventories are nearly 8% above year-ago levels. But perhaps even more important is our increased confidence that companies operating in the U.S., such as EOG Resources (NYSE: EOG ) and Apache (NYSE: APA ) , will be able to continue expanding domestic production through success in oil-rich plays like the Eagle Ford south of San Antonio, the Bakken in North Dakota, the Permian Basin of Texas and New Mexico, and, yes, the Gulf of Mexico.
But there are also a few possible additions to the brighter domestic production picture. For starters, "turnaround" time -- wherein refineries are temporarily shut down for planned and preventative maintenance -- has been completed, signaling increased draw-downs of domestic stocks. At the same time, younguns across the nation have triumphantly weathered another school year, unleashing summer's usual bevy of driving vacations. This year the season will be augmented by the recent nationwide dip in gasoline prices, without which many holidays might have been spent in local pool plunging and backyard grilling.
$10 billion to no avail
And then there's the effect of the thus far abortive effort of Royal Dutch Shell (NYSE: RDS-B ) and Saudi Arabia's Saudi Aramco to successfully flip the figurative switch on the major expansion of the big refinery at Port Arthur, Texas. The $10 billion addition of a new crude-distillation unit at the Motiva facility was to have already taken its capacity from 275,000 barrels per day to 600,000 bpd. But alas, as typically occurs when I undertake mechanical adjustments to my car, the effort thus far has failed. Nonetheless, when the start-up of the expansion at Motiva does occur, domestic crude demand obviously will be affected.
Has Europe really been repaired?
From my perspective, all of those U.S. trends signaled a slow, steady recovery for crude. But slow and steady hardly characterize the past couple of days. It seems that there's at least a trio of significant factors abroad that have turned slow into speedy:
- Europe's leaders appear to have made progress in addressing problems with Spanish banks, potentially propping up both related economies and crude demand. But have you noted that Europe's travails are typically characterized by one step forward, followed quickly by a backward lurch? I'm betting that before, say, the end of next 10 days, we'll receive new reports of angst about Greece, or Italy, or Spain.
- The two-day-old adoption by the European Union of an embargo on oil from Iran obviously is having something of a levitating effect on crude prices, despite China's partially offsetting increases in imports of the rogue country's crude. And while concerns about Israel's possible military fisticuffs with Iran -- and their potential effect on crude levies -- have subsided, should we really expect uninterrupted tranquility from President Ahmadinejad and his minions? After all, in addition to being roiled by the sanctions, Iran's leadership surely is also frothing about our role in the introduction of the Stuxnet computer worm into their nuclear aspirations.
- Do you have an opinion regarding the ultimate outcome of the Syrian conflagration? I must admit that I don't. I would, however, point out that Russia's only Mediterranean naval base is located at the Syrian city of Tartus, that Iran is a major benefactor of Syria, and that new contretemps between Syria and Turkey are unlikely to further near-term tranquility in the region.
The Foolish bottom line
I could continue, but you've likely gotten my drift: I see very little reason not to assume that the intermediate- and long-term bias of crude prices will not be to the north. For that reason, and focusing on the companies named above, I'd suggest that you look closely -- beginning with additions to your own version of Motley's My Watchlist -- of two terrific independent producers, EOG Resources and Apache Corp.