Oil leapt 6 percent on Monday to more than $43 a barrel, as a rebound in global equity markets and further evidence of supply cuts by top exporter Saudi Arabia helped the market break a six-session losing streak.

Prices dropped 25 percent last week, their biggest weekly fall in nearly 18 years, depressed by the world economic outlook.

U.S. crude for January delivery was up $2.56 to $43.37 a barrel by 1003 GMT. It fell more than 6 percent on Friday to close at $40.81, its lowest since December 2004.

London Brent crude rose $2.56 to $42.30 a barrel.

“Prices are higher on account of a short-covering bounce from extremely oversold conditions,” Edward Meir, of futures broker MF Global, said.

“OPEC’s meeting is nine days away, meaning that we could see some strengthening leading into the meeting,” he said.

Oil has fallen more than $100 a barrel from a record peak above $147 in July, as the credit crisis has started to hurt the wider economy and shrink demand for fuel.

Members of the Organization of the Petroleum Exporting Countries have called for more supply cuts when the producer group meets on Dec. 17 in Algeria.

SAUDI CUTS BACK

OPEC has already agreed to cut about 2 million barrels per day (bpd) of production. Top exporter Saudi Arabia has just provided further evidence of its intent to keep the taps tight.

The kingdom told at least two oil refiners in Asia on Monday it would deepen oil supply cuts to as much as 10 percent of normal contracted volumes in January versus a 5 percent cut in December supplies. It also reduced January supplies to some European refiners.

But OPEC may need to make an additional cut of as much as 2 million bpd to bolster prices in a market where demand is falling.

“The current downturn in prices has already priced in at least a 1.5 million bpd cut,” Tetsu Emori, a commodities fund manager at Japan’s Astmax Co. Ltd, said.

Monday’s rally spanned the commodities complex, with gold and copper rebounding strongly. European shares were firmer after strong gains in Asia.

Oil’s steep losses on Friday followed a U.S. employment report which showed the heaviest job losses in 34 years in the world’s top energy consumer.

But global markets have taken heart from efforts by Washington to finalize a rescue for the struggling U.S. auto industry.

Oil could also find support from predictions of a cold winter in the United States, with December set to be the coldest since 2000 on average.

Jane Merriman, Osamu Tsukimori, Jonathan Leff
LONDON, Dec 8 (Reuters)

The situation for oil refiners in mid-2007 was just too good. Their profits were far too large. I didn’t think the stocks could go any higher. Here’s why…

A refinery converts crude oil into usable products like diesel and gasoline. Its profits come from the “crack spread,” which is the difference between the cost of oil and the price of gas or diesel. The best situation for these companies arises when the crack spread is large and they can sell their product for a high amount relative to crude oil. This situation arose in mid-2007…

Between February 20 and March 28, the average price of unleaded gasoline rose 49.4%, but the price of crude oil only rose 21.1%. This led to huge profit margins for the oil refiners… profit margins that seemed likely to persist.

You see, demand for petroleum products was growing, and no new refineries were being built. The last new refinery in the United States was constructed in 1976. Major hurdles prevent the construction of new refineries: financing a new project, getting permits, dealing with the environmental concerns.

And refineries experienced more than 30 unplanned outages in the U.S. in April 2007. Because of these outages, 400,000 fewer barrels of oil were being processed into gasoline each day, driving gas prices higher.

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This is why most people thought I was crazy when I made a bearish call on refiners in a June 2007 issue of the S&A Digest. Investors were making money on refiners hand over fist, and the stocks were priced as if the good times would continue forever. Refiners were the darlings of Wall Street.

I disagreed…

Refinery outages are temporary problems, and simple economics says demand will moderate as prices increase. Less demand from consumers, along with the same level of gasoline production, leads to lower gas prices. So I knew these margins had to shrink.

As it turns out, I was right. By last month, refiners’ profit margins had disappeared… and with them went the refiners’ stock prices. An index of the four largest refiners fell by half.

Today, however, we are in the opposite situation. The price of oil has outrun the price of gasoline, and oil refiners’ margins are terrible.

The following chart shows my crack-spread indicator (a ratio of the price of gasoline to the price of oil) compared to an index of oil refining stocks. If the gray line is above zero, the crack spread is above its average level. If it is below zero, it’s below average.

As you can see, the crack spread has risen substantially from its March low.

Oil refiners are cheap, they are rallying, and investment banks are upgrading the stocks. Unfortunately, there is no refiner ETF. But here’s a look at the four largest U.S. refiners…

As you can see, all of these stocks are extremely cheap right now. And I believe the worst is now over for oil refiners. The situation is going from bad to less bad. The last time oil refiners were in this situation, the refiner index rallied by 40% in the following six months.

Good investing,

Ian

Source: A Six Month Trade for 40%

This beaten-up environment is where our colleague Jeff Clark tends to make an absolute fortune trading “rebounds.” On May 12, Jeff told S&A Short Report readers the refiners were due for a bounce and recommended a leveraged trade on Tesoro, one of America’s largest refiners. His readers closed out half the position for 36% gains in less than a month.

If oil continues to decline from its extended levels, expect more gains from Tesoro and the rest of the refinery gang. Also, expect Jeff’s readers to make a ton of money with the best trader we know. Click here to learn more about a limited-time offer to get the S&A Short Report… before the price of Jeff’s in-demand advice is set to double.

Source: An Oil Tip from the Best Trader We Know

“The trend that is important behind the story of the future expansions is the downtrend in gasoline,” said Joanne Shore, analyst for the U.S. Energy Information Administration, speaking to Thomson Reuters.

“We feel that demand for distillates is going to be higher than gasoline for the next several years. And margins right now for distillates are quite a bit higher than gasoline, so it makes more sense to do your investments there than other projects,” Valero Energy Corp spokesman Bill Day said, in the same article.

Demand for diesel is increasing globally, with China and Europe playing a major part in driving prices up. This from Bloomberg:

China is pushing the price of diesel fuel higher by stockpiling it ahead of both the Summer Olympics and the need to rebuild Sichuan province after last week’s earthquake … The country is hoarding the fuel in the event that its power grid fails and it needs to use backup generators.

Low inventories in Europe are also pressuring diesel prices, which have risen 53 percent in the last year in the US, compared with a 20-percent increase in gasoline.

Tom Dyson in Daily Wealth says, “I’m trying to figure out if ethanol’s a good investment. Frankly, I haven’t made up my mind yet. The fortunes of the ethanol industry depend on the government. Without the government’s support, the ethanol industry wouldn’t exist in America. So to invest in ethanol, you have to know what the government’s going to do.

“John McCain hates ethanol. If he wins the election, he’ll remove all the ethanol subsidies and hurt the farm economy. If the Democrats win, they’ll keep the subsidies in place, and ethanol stocks will probably take off.”

And lastly I talked about how the only thing you’d have extra money for are the higher food prices you’ll have to pay.

Well, now the mainstream media is catching on, albeit a few weeks late. Today I saw this Bloomberg article.

Let me take an excerpt, because it looks like these people are reading IDE everyday.

Economists have a different take: They say the oil companies may end up the biggest beneficiaries, while the aid to families wouldn’t be enough to buy a $35 backpack.

The trouble with the plan, they say, is that oil prices are rising because of low supplies, and companies will continue to charge the average $3.60 a gallon and just pocket the money that would have gone to federal taxes.

“That’s $10 billion, and it’s going into the pockets of oil refiners,” said Leonard Burman of the Tax Policy Center in Washington. “The last time I checked, they didn’t need it.”

As it appears now Clinton is joining the gas-tax holiday bandwagon. She thinks that this tax somehow takes excess profits away from oil companies. Um, last time I checked a tax holiday takes money away from government. After all, they’re the ones taxing!

And then McCain thinks this holiday will somehow give parents the money they’ll need to go back to school shopping. What does he think, that parents fill up their tank twice a day? This money won’t be anough for a damn thing!

Oh well, asking the government to be logical is like asking a kid to not eat chocolate.

Today the market looks like it wants to push much higher. The Fed announce an expansion of their term auction facility (now they’re loaning $75 billion instead of $50 billion) and unemployment numbers came in less than expected.

Makes me happy that I got into three recent long positions and they’re all doing well. In fact, the one I bought in my personal account rallied nearly four percent from my buy point!

Hopefully today ends on an up note.