The third week of March was brutal for a lot of commodities, but not so bad for crude oil. Prices did go lower, but the uptrend is still in tact and prices remain well above the 40 day moving average. It is fair to wonder, at this point, how much upside is left in crude oil prices, but given the politics and fundamentals of oil, I do not recommend selling this market short under any circumstance (updated 5-7).

Fundamental Stats -

The number one problem in this market has been that world oil production has been relatively flat for two years while world demand continues to grow and there is no easy solution in sight. The key statistic in the crude oil market is world surplus production capacity and that was only 2.20 million barrels per day (mbd) in 2007 - most of it in Saudi Arabia. On May 6, 2008, the U.S. Energy Department said that they expect surplus capacity to be 2.08 mbd in 2008 and 3.52 mbd in 2009. The politics of the Middle East remain tense. Roughly 20% of the world's oil flows through the Strait of Hormuz and Iran has the ability to block the channel.

On May 6, 2008, the DOE estimated OPEC's actual production at 31.78 mbd in April with 2.1 mbd coming from Iraq. That was down from 32.31 mbd in March. The DOE also estimated that 2008 world production will increase by 2.0 mbd to 86.60 mbd and nearly meet world consumption of 86.61 mbd. Whether the market can actually deliver the increase in production remains to be seen. West Texas crude prices are expected to average $109.53 in 2008, up from $72.32 a year ago. As of May 2nd, U.S. crude stocks were down 4% from a year ago.

Fundamental Stats -

Gasoline prices are painfully high, but refiners are not motivated to produce more. Unleaded gasoline supplies were up 8% from a year ago and demand over the past four weeks was up .3% from a year ago. As of May 2nd, the nation's refinery activity slipped from 85.4% to 85.0% of capacity - still sluggish. On May 6, 2008, the DOE predicted that retail regular gasoline will average $3.52 per gallon in 2008, up from $2.81 a year ago.

Fundamental Stats -

It looks like the northeastern U.S. got away with a relatively mild winter. Distillate supplies are down 13% from a year ago and demand for all distillates over the past four weeks was down .5% from a year ago. As of May 2nd, heating oil supplies were down 38% from a year ago (the use of heating oil is obviously diminishing). On May 6, 2008, the DOE estimated wholesale heating oil prices to average $2.99 in 2008, up from $2.06 a year ago.

On February 8th, June natural gas closed at its highest level in seven months and that is impressive. Like most commodities, prices got hit the third week of March, but rebounded fairly quickly and remain in a strong uptrend (updated 5-7).

Fundamental Stats -

Natural gas prices got stronger at the start of 2008 and there are concerns that future rates of production may not keep up with demand. As of May 2nd, the DOE said that underground storage levels were down 17% from a year ago and down slightly from the five-year average. On May 6, 2008, the DOE estimated that new supplies of U.S. natural gas will only be up .7% in 2008 to 64.31 billion cubic feet (bcf) per day (including imports). That should be just enough to cover the estimated demand of 64.05 bcf. The DOE expects the Henry Hub spot price to average $9.69 in 2008, down from $7.17 a year ago.

Which U.S. regions are the biggest consumers of natural gas? Number one is the West South Central Division, consisting of Arkansas, Louisiana, Oklahoma, and Texas. A close second is the East North Central Division, consisting of Illinois, Indiana, Michigan, Ohio, and Wisconsin. A distant third is the Pacific division, consisting of Alaska, California, Hawaii, Oregon, and Washington.