The oil (NYMEX:CLU13) bulls that have controlled oil for the month of July are in trouble. With near record long positions in both Brent and WTI crude and chart formations that are looking ominous they need the Fed to justify their bullishness. Oh sure, we have a lot of other data, such as GDP and the ADP employment report, Chicago Fed not to mention the Energy Information Administration supply report but what the bulls need is reassurance that the Fed will keep the bull market alive.
The American Petroleum Institute supply report seems to suggest a return to normal. Forget those wild inventory drops it seems like we have found a more normal balance. Crude oil inventory did fall but by only by 740,000 barrels. As crude imports rebounded after Canada resolved some pipeline issues. Crude imports rose last week by 116,000 barrels per day to 7.882 million bpd. Crude stocks at the Cushing, Oklahoma, and delivery hub fell by 1.9 million barrels as the Big Whiting refinery being back on line helped sop up extra supply that normally would be sitting in Oklahoma for a while. Refinery crude runs fell by 162,000 barrels per day as refining issues slowed the recent refiner's historic momentum. Despite the slight drop in runs gas inventories increased by 1.8 million barrels yet distillate fell by 497,000 barrels. Not the kind of numbers that would inspire the increasing worried bull side of the market.
The bulls seem to also be getting some diminishing support from turmoil in Egypt and a provocative report on Iran's nuclear ambitions. Bloomberg Reported "Iran may achieve by mid-2014 the "critical capability" to process its low-enriched uranium into fuel for a nuclear weapon without detection by international inspectors, according to a report by a research group. Iran would reach this capability by acting on plans to install thousands of additional enrichment centrifuges at its Natanz and Fordow sites, according to David Albright, a former nuclear inspector, and Christina Walrond of the Washington-based Institute for Sciences and International Security. Preventing Iran from achieving the capability to break out from nuclear safeguards will require international efforts to limit the number and type of centrifuges that the Islamic Republic builds, according to the report issued today. "Although increasing the frequency and type of inspections at the enrichment plants is important, it is by no means sufficient to prevent Iran from achieving critical capability," according to the analysts." In Egypt the military is asserting control. Despite recent violence it seems that the market is downplaying risk to supply or at the very least have already priced in a premium that is sufficient based on recent moves.
So that brings us back to the Fed. Never has an announcement that may say so little but will influence so much. When it comes to tapering we know it's the 6 degrees of tightening. The nuances of perception could move us one way or the other. The Fed has gone to great lengths to explain that tapering isn't tightening but in a world of negative real interest rates it really is. Besides you have to taper before you raise rate, unless you go cold turkey. Tapering is tightening if only in the loosest sense. And with tightening, if the data gets worse you can always reverse it. Yet markets are coiled like a snake ready to move assuming the Fed provides an illusion to feed into the trader's delusions.
Natural gas still is under the weight of historically low temperatures for the month of July! There are no air-conditioners humming and power demand should be below what you might expect for this normally hot and sticky time of year. Low nat gas prices though should inspire some nat gas fuel switching.
In the big picture though more signs that natural gas may be the fuel of choice with our abundant supply. The Wall Street Journal reports "Ford will begin selling an F-150 pickup truck later this year that is modified to run on compressed natural gas, as demand continues to grow among commercial fleet buyers. Ford sold 11,000 trucks last year that run on natural gas, and that was double what the company sold in the years of 2009, 2010 and 2011 combined. Until now, Ford hadn't made it an option available on the base F-150, reserving it for heavier-duty models and its Transit Connect delivery van. With the addition of the F-150, Ford expects to sell about 15,000 CNG vehicles this year, the company said in a statement. We did this because customers were asking for it," said Kevin Koswick, Ford's director of North American fleet sales operations.
Chrysler Group LLC and General Motors Co. GM already offer compressed natural gas as an option on its half-ton pickup trucks and Ford offers it on its larger, heavy-duty pickups and vans. Of the Detroit companies, only Chrysler is installing the special tanks and fuel lines in the trucks at its own factory. Ford and GM send the trucks to an up-fitter that installs the equipment. Neither GM nor Chrysler would disclose how many CNG vehicles they have sold this year. The Natural Gas Vehicles for America—a trade group—estimates that there are about 130,000 natural gas vehicles on U.S. roads, primarily in commercial trucks and buses.
Companies, including Pioneer Energy Services and AT&T Inc., have been among Ford's biggest clients for the compressed natural gas. The extra cost to build the trucks can quickly be covered because the companies use so much fuel at a higher cost and refueling isn't difficult because they can install their own natural gas pumps. "The market for these vehicles really started in 2009 when the invention of horizontal drilling and fracking," said Robert Stevens, chief engineer for commercial trucks. "That's when the cost of natural gas and gasoline diverged for the first time." Natural gas costs range widely from less than $1 to nearly $3 per gasoline-gallon equivalent. Natural gas fueled vehicles, much like battery-powered electric cars, are slowly but steadily providing a legitimate alternative to gasoline and diesel, but they make up a very small portion of the market. Natural gas makes the most financial sense on large vehicles where the size of the tank can be accommodated more easily without changing the vehicle's utility.
The advantages of natural gas include its cost, and plentiful availability of underground lines around the country to supply the fuel. It is energy dense and can work in gasoline engines with alterations that only cost a few hundred dollars. But like electric vehicles, there are big drawbacks, namely the upfront cost, paucity of refueling stations and the size of the fuel tank. On Ford's trucks, buyers pay about $315 for the engine modifications and then another $8,000 to $16,000 to have a fuel tank and lines installed. For an F-150, the cost is expected to be $7,500 to $9,000 to modify the truck. And unlike electric cars, there are is no federal tax credit available to defray the costs." Of course as time goes on and Nat gas supply is abundant those costs will come down.