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Thursday, July 09, 2015

New Trading Range for Oil - John Stolberg

One great advantage of writing an investment letter and moderating several investment discussion forums is I get ideas and research via email from my readers to consider.  Some give me permission to publish what they send me and use their names and others ask me to keep their contributions anonymous.

This commentary is from a long-time reader and newsletter subscriber, who has been a friend and contributor way back to my  "Personal Finance and Investing" days at Suite101 back in the early 2000s.   Trekkies will get a chuckle from his signature.
-------- Forwarded Message --------
Subject: New Trading Range for Oil
Date: Thu, 9 Jul 2015 05:22:13 -0500
From: John Stolberg
To: Kirk Lindstrom
Dear Kirk,

Oil markets are still oversupplied and recent weakness in China is likely to keep continued pressure on oil prices.

The US Energy Information Agency is likely to revise US oil production numbers down for May and June as it replaces extrapolations with real numbers which take up to 4 months to come in.  US oil production numbers are likely to continue downward for the rest of the year.

So the oil markets are still oversupplied, but not nearly as badly as they were before.  Prices broke out of their flag to the downside and previous support of $57 to $58 per barrel is now likely to become resistance.  However, I don't see prices below $48 per barrel for long.  A retest of the low is possible, but I expect the new trading range to be between $48 and $58 per barrel.

Gasoline sales usually peak for the year during the July 4th weekend.  Gasoline prices should be trending lower for the rest of the year.  Refiners have been churning out record volumes of gasoline at very high margins.  Their earnings for this summer are likely to be unsustainably high. I sold VLO earlier this year.  I tend to be early.  The stock is slightly higher now.  Valero is trading with a trailing P/E of less than 9 and a dividend rate of 2.4%.  PEG is 0.63 based on a 5-year earnings growth rate of 14%.  But the growth estimate for next year is –12.5%, so I see the potential for a stock price drop between now and when the end-of-year dividends are paid out.

Refiners are also profiting from US law which allows for the export of refined products but not US crude.  That law could change before the end of the year.

(aka John Stolberg)
Thanks John!
PS During our Suite101 days I signed my posts with "Kirk out"

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