Almost Everyone Is Downgrading Yelp Today

By Jayson Derrick

July 29, 2015 10:17am

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Shares of Yelp Inc YELP 27.66% plunged more than 25 percent after the company reported its second quarter results that included a full year fiscal 2015 guidance coming in below expectations.

Oppenheimer: Yelp's Competition To Blame

Jason Helfstein of Oppenheimer commented in a note that Yelp's revised guidance reflects "difficulty" in hiring new salespeople, sales productivity, and the discontinuation of brand advertising, all caused by competition from programmatic ad platforms.
Helfstein added the company's guidance suggests a "reduced salesforce productivity" from plus 12 percent year-over-year in the first half of 2015 to plus 5 percent in the bottom half. The analyst also noted that Yelp's plan to spend $10 million a quarter in the bottom half of the year to drive user engagement adds risks to the company's long-term margins.
Related Link: Yelp Crashes On Bad Guidance, Downgrades
Bottom line, Helfstein stated that he believes in the underlying value of Yelp's reviews to consumers. However, until the company can prove S&M leverage in its results, investors will assume 20 percent terminal margins, down from a previous 40 percent.
Shares were downgraded to Perform from Outperform with a removed $60 price target.

Morgan Stanley: The Bear Case Is ‘Playing Out'

Brian Nowak of Morgan Stanley commented in a note that Yelp's second straight quarter of "mis-execution," lower sales hiring and sales productivity, coupled with the "surprising" elimination of the branded ad business and rising sources of margin pressure has resulted in a "more cautious outlook" and evidence that the bear case "playing out."
Nowak said his "more cautious view" is further supported by the simple fact that "fewer sales people + lower productivity = fewer local ad dollars." In fact, the analyst's previous bullish thesis was based on Yelp's ability to continue hiring more local sales people and the company's target of 30 percent growth in hiring is below his 35 percent expectations.
Bottom line, Yelp's elimination of its brand advertising will be a headwind to EBITDA margins while the company's struggles to fill its salesforce creates a "structural challenge" to its long-term sales force productivity.
Shares were downgraded to Equal-Weight from Overweight with a price "significantly reduced" to $25 from a previous $53.

JMP: Stepping To The Sidelines Until Trends Improve

Ronald Josey of JMP Securities commented in a note that Yelp's 83 million reviews and 18 million mobile app users are "highly proprietary" and "not easily replicable." However, the company's decision to exit its high-margin brand advertising business and slower planned hiring for its sales force "alters" the company's growth trajectory and profitability.
Josey continued that investors should move to the sidelines until the company can show improving trends in overall traffic and engagement as well as stabilization across its core local advertising business.
Shares were downgraded to Market Perform from Market Outperform with no assigned price target versus a previous price target of $56 which was assigned on April 30.

Cantor: Expectations Reset, Opportunity Remains ‘Substantial'

Youssef Squali of Cantor Fitzgerald commented in a note that Yelp's opportunity in the local online ad market remains "substantial."
The analyst noted that the number of companies with the scale, brand and network effect to capitalize in the local online ad market is "limited" and Yelp's positioning makes it a "prime beneficiary" as an operator and acquisition target.
Commenting on Yelp's decision to eliminate its brand advertising segment will result in a near-term hit to its top line and profitability, but the decision could actually enhance user engagement and the company's value proposition over the medium and long-term.
Shares remain Buy rated with a price target lowered to $50 from a previous $68.
Related Link: Yelp Could Have Been 'Ridiculous,' Disappointed Instead

SunTrust: Risk/Reward Profile ‘More Favorable Here'

Bob Peck of SunTrust Robinson Humphrey commented in a note that perhaps Yelp's risk-to-reward profile is now "more favorable" with forecasts being "slashed" which allows a better setup to meet or beat moving forward.
Peck pointed out that Yelp's Core Local is still a greater than $400 million run-rate business growing greater than 40 percent into "ever easing comps" while Eat24 is a greater than $35 million run-rate business growing greater than 70 percent. In addition, the analyst suggested that short covering could also "lend support."
Share remain Buy rated with a price target raised to $37 from a previous $52.

Elsewhere On The Street

Analysts at Bank of America downgraded shares to Underperform from Neutral with a price target lowered to $25 from a previous $55.
Analysts at Cowen downgraded shares to Market Perform from Outperform with a price target lowered to $25 from a previous $55.
Analysts at Raymond James downgraded shares to Market Perform from Outperform.
Analysts at Topeka downgraded shares to Hold from Buy.

Latest Ratings for YELP

Date	Firm	Action	From	To
Jul 2015	Credit Suisse	Maintains		Outperform
Jul 2015	JMP Securities	Downgrades	Market Outperform	Market Perform
Jul 2015	Brean Capital	Reiterates		Buy

View More Analyst Ratings for YELP
View the Latest Analyst Ratings

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Tableau Software (DATA) Trading With Heavy Volume Before Market Open

By TheStreet Wire Follow | 07/29/15 - 09:27 AM EDT

Get TheStreet Quant Ratings' exclusive 5-page report for (DATA) now.

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer. Trade-Ideas LLC identified Tableau Software ( DATA) as a pre-market mover with heavy volume candidate. In addition to specific proprietary factors, Trade-Ideas identified Tableau Software as such a stock due to the following factors:

• DATA has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $84.9 million.

• DATA traded 262,114 shares today in the pre-market hours as of 9:12 AM, representing 32.7% of its average daily volume.

EXCLUSIVE OFFER: Get the inside scoop on opportunities in DATA with the Ticky from Trade-Ideas. See the FREE profile for DATA NOW at Trade-Ideas More details on DATA: Tableau Software, Inc., together with its subsidiaries, provides business analytics software products in the United States, Canada, and internationally. DATA has a PE ratio of 3186. Currently there are 18 analysts that rate Tableau Software a buy, no analysts rate it a sell, and 4 rate it a hold. The average volume for Tableau Software has been 982,900 shares per day over the past 30 days. Tableau Software has a market cap of $6.4 billion and is part of the technology sector and computer software & services industry. The stock has a beta of -0.29 and a short float of 4.9% with 3.04 days to cover. Shares are up 47.5% year-to-date as of the close of trading on Monday. EXCLUSIVE OFFER: See inside Jim Cramer's multi-million dollar charitable trust portfolio to see the stocks he thinks could be potential winners. Click here to see his holdings for 14-days FREE. TheStreetRatings.com Analysis: TheStreet Quant Ratings rates Tableau Software as a sell. The company's weaknesses can be seen in multiple areas, such as its disappointing return on equity and feeble growth in its earnings per share. Highlights from the ratings report include:

• The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Software industry and the overall market, TABLEAU SOFTWARE INC's return on equity significantly trails that of both the industry average and the S&P 500.
• TABLEAU SOFTWARE INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past year. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, TABLEAU SOFTWARE INC reported lower earnings of $0.04 versus $0.15 in the prior year. This year, the market expects an improvement in earnings ($0.39 versus $0.04).
• The change in net income from the same quarter one year ago has significantly exceeded that of the Software industry average, but is less than that of the S&P 500. The net income has significantly decreased by 78.1% when compared to the same quarter one year ago, falling from -$5.63 million to -$10.03 million.
• The gross profit margin for TABLEAU SOFTWARE INC is currently very high, coming in at 91.84%. Regardless of DATA's high profit margin, it has managed to decrease from the same period last year.
• Net operating cash flow has significantly increased by 144.33% to $35.00 million when compared to the same quarter last year. In addition, TABLEAU SOFTWARE INC has also vastly surpassed the industry average cash flow growth rate of -29.04%.

• You can view the full Tableau Software Ratings Report.

12年来的历史性一刻 伊朗核协议谈成了(图)

京港台：2015-7-14 23:06| 来源：观察者网 | 评论( 2 )条  | 我来说几句

12年来的历史性一刻 伊朗核协议谈成了(图) 来源：倍可亲(backchina.com) 中东棋局的关键一子终于落下。今天（14日），经过近10年的谈判，伊核问题六国与伊朗达成历史性协议，后者同意限制核计划，换取国际社会减轻制裁。至 此，伊朗与美国主导的西方势力长达12年的对抗终现松动。国际原油市场率先做出反应，美国基准原油报价在短时间内下滑了1.2美元。 　　综合外媒报道，欧盟外交和安全政策高级代表莫盖里尼与伊朗外交部长扎里夫于当地时间14日在维也纳宣布，伊朗和伊核六国就伊核问题达成全面协议。 　　据新华国际客户端消息，该全面协议由正文及五个技术附件组成，五个技术附件分别涉及核、制裁、民用核能合作、联委会及实施等五方面内容。以下是部分要点： 　　——伊朗重申在任何情况下都不会寻求、开发和获得任何核武器。 　　——成功落实全面协议将使伊朗在《不扩散核武器条约》相关规定下完全拥有和平利用核能的权力，伊朗的核计划也将与《不扩散核武器条约》其他签约国受到同样对待。 　　——伊朗将把离心机的数量削减三分之二，从约1.9万台减少至6104台。 　　——国际社会对伊朗的武器禁运将再持续5年。 　　——国际原子能机构人员可以在24天内进入伊朗境内被认为可疑的地点。 　　——国际原子能机构核实伊朗核计划的和平性质后，联合国、美国以及欧盟将解除对伊朗的经济和金融制裁。 　　——如果伊朗方面违反协议，相关制裁将在65天内恢复。 　　——伊朗有权对国际核查人员的核查要求提出异议，由伊朗和六国人员组成的仲裁机构将做出裁定。 　　——伊朗阿拉克重水反应堆将重建，仅用于和平目的。 　　另据外媒此前披露的草案内容，伊朗还同意15年内将铀浓缩浓度限制在不超过3.67%的范围内，联合国对伊朗的弹道导弹制裁将保留8年。 　　据悉，全部文本将从14日起向公众开放，新决议案将立即递交联合国安理会通过。新协议将在安理会批准后90天内生效。如国际原子能机构证实伊朗执行所有商定步骤，欧盟将同时解除对伊的经济和金融制裁。 　　伊朗外长扎里夫表示，协议是经由艰苦的努力才达成的。他表示，这份“双赢”的协议结束了“一场没有必要的危机，同时，为讨论影响国际社会的重大问题开启了天地”。扎里夫承认，虽然最后的协议并非完美，但这仍是“历史性时刻”。 　　莫盖里尼则表示，这次协议的达成，显示了“外交手段、协调、合作可以克服数十年的紧张和对抗”，“翻开了国际关系的新篇章”。 　　美国总统奥巴马、伊朗总统鲁哈尼均在第一时间发表了各自的看法。奥巴马认为，该协议“切断”了伊朗获取核武器的各条路径，他同时警告国会，如果想要阻拦伊核协议，他将对国会的决定予以否决。鲁哈尼认为，协议满足了伊朗主要核谈目标，开启了伊朗与世界关系的“新篇章”。 　　伊朗国家电视台还直播了奥巴马的讲话，此举自1979年两国交恶以来共两次，上次是4月2日伊核框架协议达成。 　　而就在西方媒体将“历史性一刻”写入新闻之际，同日，一直反对伊核协议的以色列总理内塔尼亚胡表示，协议是个“历史性错误”，因为伊朗将会获得大笔资金，继续在区域和世界范围内进行恐怖侵略，“伊朗将会获得一条通向核武器的稳妥之路”。 　　此外，伊朗在海湾地区多年来的对手沙特和阿联酋均悄然表达了担忧之意，认为伊朗在与西方达成和解后，实力增强，将会打破区域平衡。 　 　伊朗核谈的突破的确来之不易。此前，伊核问题六国（观察者网注：中、美、英、法、俄、德）与伊朗的最新一轮谈判进行了长达一年半，最终协议原定6月30 日达成，但在6月30日、7月7日、和7月10日三个谈判期限前都未能消除分歧，谈判期限不得不一延再延。这轮谈判一个特别需要解决的问题，主要是伊朗要 求解除联合国安理会对伊朗的武器禁运。 　　而更早一轮的谈判（第3轮）要追溯到2013年，当时，由于分歧严重，伊朗与六国未能达成全面协议。同年11月签订的临时协议，尽管减轻了对伊朗的制裁，但仍保留了大部分制裁措施。 　 　自2003年伊朗宣布成功提炼出铀以来，联合国已通过四个制裁伊朗的决议，美欧还出台了制裁法案。联合国对伊朗制裁主要集中在禁止伊朗参与国外核领域的 投资、运输和金融活动。美国则切断伊朗所有金融机构与美国银行体系的联系，包括向伊朗能源、贸易公司和央行提供物质支持的今后的制裁。2006年开始，伊 核问题六国开始与伊朗展开谈判。 　　伊朗石油或将“解禁” 涌入国际石油市场 　　随着争吵了十余年之久的伊朗核问题有望彻底解决，未来可能有更多伊朗石油“解禁”，涌入国际石油市场。 　　伊朗拥有全球10%原油储备和近五分之一天然气储备，是世界第四大产油国，OPEC第二大产油国，石油出口占其财政收入的40%-50%。目前，12项能源制裁和20项金融制裁封锁了伊朗石油出口的大门。 　 　比如，随着国际社会在伊核问题上不断施压，2011-2013年间，中国与伊朗的石油贸易随之缩减。2013年5月，中国从伊朗进口日均43.5万桶原 油，比2011年底的日均55万桶减少了21%。从2011年下半年起，中国三大石油公司也都放缓了在伊朗的石油作业。 　　但在伊核问题临时协议自去年1月生效之后，中国2014年从伊朗进口的原油迅速恢复，其规模创下2011年以来的最高纪录。中国海关总署1月公布的数据显示，中国2014年从伊朗进口了2750万吨原油和凝析油，日均高达55万桶，同比增长28.3%。 　　这一趋势有望在今年继续。据伊通社援引伊朗海关数据显示，仅在今年2月，伊朗对华原油出口就达204万吨，日均出口53.24万桶，环比增长13.5%。 　　业内人士预测，如果制裁在今年年底前暂停，那么今年就会有大量的伊朗石油流入到国际市场，日本、韩国、中国、印度和土耳其将乐于跟伊朗签署新的购买协议，增加原油购买量。 　　2014年年初，伊朗石油部长赞加内曾表示，一旦制裁取消，伊朗石油出口量能够立即恢复到每天400万桶的满负荷出口能力。

阅读详情: http://www.backchina.com/news/2015/07/14/373271.html#ixzz3fsupE4sA

Greece Reform Proposals: June vs. July

Greek voters just rejected one set of bailout proposals. What's the difference this time around?

by Jenny ParisChristos Ziotis

July 10, 2015 — 8:12 AM EDT

Greece’s reform proposals are strikingly similar to the ones Greek voters overwhelmingly rejected at a referendum only earlier this week. Yet, there are a few differences, some crucial and others less substantial.

Here is a list of where the two proposals converge and where they still stand apart:

Financing and Debt

Greece is asking for three-year loans of at least 53.5 billion euros ($59.9 billion) to cover its financing needs between 2015 and 2018. It is also seeking debt restructuring and reprofiling of its long-term debt due after 2022. The earlier proposals were in return for a five-month extension of an existing bailout program for loans of as much 15.5 billion euros and didn’t involve any debt restructuring. Fiscal targets remain the same with primary budget surplus seen at 1, 2, 3, and 3.5 percent of the gross domestic product between 2015 and 2018, even amid signs that the economy may have deteriorated under capital controls and shuttered banks for nearly two weeks.

Tax Reforms

With few exceptions, the Greek government adopts the creditors’ proposal on sales and corporate tax rates. The government is seeking to eliminate sales tax discounts on islands gradually by the end of 2016 instead of immediately, starting higher-income islands that are popular tourist destinations. It also seeks to keep hotels under a reduced 13 percent rate instead of the standard 23 percent.

Pension Reforms

The government is in agreement with the creditors in eliminating early retirement benefits and envisages savings of 0.25-0.50 percent of GDP in 2015 and 1 percent of GDP in 2016, effective from July 1, in line with demands under the earlier proposals. It proposes implementing a “zero-deficit” clause for supplementary and lump-sum pension funds, adopted in 2012, from October instead of immediately. While it agrees to phase out a supplementary allowance for low pensions by the end of December 2019, it wants to start phasing-out these benefits from March 2016 instead of starting immediately.

Fiscal and Structural Measures

Greece wants to increase advanced income tax payment on corporate income to 100 percent and gradually for individual businesses by the end of 2017, as part of steps to close loopholes for tax avoidance. It also proposes to eliminate preferential tax treatment for farmers by the end end of 2017. The creditors wanted these steps to be implemented by the end of 2016.
The government appears to backtrack on its own earlier proposals for military spending cuts, offering to reduce spending by 100 million euros in 2015 and 200 million euros in 2016. It had earlier suggested to cut military spending by 200 million euros in 2016 and 400 million euros in 2017. The creditors have sought an immediate cut in annual military spending by 400 million euros.
It offers instead to extend implementation of a luxury tax on recreational vessels in excess of five meters instead of in excess of 10 meters.

Labor Reform

Government insists to legislating changes to collective bargaining agreements this fall; creditors don’t want any changes to already agreed labor framework and demand that any changes be negotiated with the three creditor institutions first -- the European Central Bank, the International Monetary Fund and the EU.

Privatizations

This is where the government appears to fully adopt the creditors’ demand for all agreed sales of state assets to proceed, including transferring the state’s shares in the Hellenic Telecommunication Organization SA to the asset sales fund and selling regional airports under terms already agreed with a venture led by Fraport AG, the winning bidder already selected by the previous government.

Crude Oil Remains A 'Sell' After Rising Imports Fuel Surprise Inventory Build

Jul. 2, 2015 5:19 AM ET  |  9 comments  |  About: The United States Oil ETF, LP (USO), Includes: RSX, UWTI

Disclosure: I am/we are short USO. (More...)

Summary

• Crude oil prices closed down 4% yesterday, breaking through a 2-month support level at $57/barrel, after an EIA report showed an unexpected build in inventories.
• I argue that the domestic supply/demand balance has not improved and is just as bearish now as it was last winter when oil was in free fall.
• Based on my analysis of supply/demand data presented in this article, I believe crude oil has further to fall.
• My trading strategy, including holdings, price targets, and entry/exit points are discussed in detail.

After trading tightly range-bound between $58/barrel and $61/barrel since mid-April, crude oil finally broke down yesterday, after an EIA Petroleum report showed that crude oil inventories increased more than expected. The commodity slid 4.2% - its largest single-day loss since April 8 - to a 9-week low closing price of $56.92/barrel. The commodity is down 6.6% since recording a peak of $61/barrel one week ago on Tuesday. Further weighing on prices were unclear reports of a draft of an Iranian nuclear deal that would relax sanctions and permit a resumption of exports, as well as continued fears over Greece's exit from the eurozone. This article will discuss yesterday's EIA inventory report and use this data to support my argument that crude oil supply and demand remain just as unbalanced presently as when oil was trading at $45 per share, justifying my continued bearish position on the commodity.
In yesterday's Petroleum Report for the week ending June 26, the EIA announced that crude oil inventories increased by 2.4 million barrels, versus the analyst consensus for a 2-million barrel storage withdrawal. The storage build was also markedly bearish compared to last week's 4.9 million barrel withdrawal, last year's 3.2 million barrel withdrawal and the 5-year average 4.1 million barrel withdrawal. It was the first storage injection in 9 weeks since the week ending April 24. Storage injections during the final week of June are highly unusual, and last week's build was the first storage injection during the last week of June since the week ending June 29, 2007, and only the third this millennium.
At 480 million barrels, total crude oil storage is 90 million barrels above the five-year average inventory level and 80 million barrels above last year's level, versus a 84 and 75 million barrel surplus last week, respectively. The increase in crude oil surplus is a sharp departure from the past two months which had seen surpluses, versus the five-year average decline in 8 of the past 9 weeks from a peak of over 113 million barrels. Figure 1 below shows the storage surplus versus the five-year average and 2014 over the past year.
(click to enlarge)
Figure 1: Crude oil storage surplus versus 2014 and the 5-year average showing an increase in the surplus after several weeks of decline. [Source: Chart is my own, data from the EIA.]
What happened over the past week that led to such an abrupt change in crude oil supply/demand balance?
Not much, I argue. And that is the problem.
There are three components of US supply/demand balance - domestic production, demand (measured by refinery inputs), and imports.
Domestic production was largely unchanged last week, declining by 9,000 barrels per day, from 9.604 million barrels per day the previous week to 9.595 million barrels last week. Domestic production remains at record highs, despite an oil rig count that has fallen 60% since October. Production is up 1.2 million barrels year-over-year.
Crude oil demand was likewise flat week-over-week, declining a negligible 1,000 barrels per day last week to 16.531 million barrels per day. Demand is up 313,000 barrels per day year-over-year. Note that this is well shy of the 1.2 million barrel per day year-over-year increase in production. As a result, the purely domestic supply/demand picture - demand minus US production - is markedly loose compared to last year. Figure 2 below compares the purely domestic supply/demand picture for 2015 versus 2014.
(click to enlarge)
Figure 2: Purely domestic crude oil supply/demand balance equal to demand minus domestic production. Supply/demand remains loose to 2014 and has been flat over the past 2 months, indicating minimal tightening of the market. [Source: Chart is my own, data from the EIA.]
Note that last year at this time, demand exceeded domestic production by 7.8 million barrels per day, while last week, this spread was just 6.9 million barrels. Further, despite all of the hullabaloo over record demand and declining domestic production, this spread is sitting near the 2015-to-date average of 6.6 million barrels, and has been essentially flat since late April.
It is the third component of the US supply/demand picture - imports - that drove last week's bearish storage build and had been masking the persistent supply/demand mismatch shown above in Figure 2 that allowed crude oil to rally more than 30% off the March lows. Imports increased by 748,000 barrels per day last week to 7.513 million barrels per day. It was the largest week-over-week increase since the week ending April 3rd and the largest daily average since the week of April 17th. Nevertheless, the 7.5 million barrel per day tally was a mere 170,000 barrels per day above the 1-year average import level. Figure 3 below plots crude oil imports versus the 1-year average over the last 12 months.
(click to enlarge)
Figure 3: Crude oil imports versus the 1-year average. After 2 months well below the 1-year average, crude oil demand rebounded last week. [Source: Chart is my own, data from the EIA.]
Note that after hovering in the 6.75-7.25 million barrel per day range since late April, last week's imports were merely a return to the baseline. Furthermore, imports have room to go even higher. Figure 4 below shows the week-over-week change and the departure from 2015-to-date average imports by country.
(click to enlarge)
Figure 4: Crude oil imports by nation with week-over-week and departure versus the 2015 average included. While imports from Canada rebounded last week, large deficits versus the 2015 average remain in Canada, Saudi Arabia, and Mexico. [Source: Chart is my own, data from the EIA.]
Note that the second-largest weekly increase in imports last week came from our biggest oil trading partner, Canada, where imports increased by 142,000 barrels per day. However, thanks to persistent wildfires in Alberta's prolific oil sands, imports are still 187,000 barrels per day below their 2015 average. As these wildfires have largely diminished, I expect Canadian imports will continue to increase, from 2.8 million barrels per day last week back to their 3.0 million barrel per day 2015 average in coming weeks. An even more impressive departure versus the 2015 average was seen in Saudi Arabia, where imports remained flat at 700,000 barrels per day last week, more than 250,000 barrels below their 2015 average of 992,000 barrels per day. Saudi Arabia is a country whose rig count is at record highs and which is spearheading the effort to destroy the US shale oil industry, so I expect these imports will recover rapidly over the next month. Finally, our third-largest trading partner, Mexico, saw its imports slide 290,000 barrels per day last week, and currently sit 215,000 barrels per day below its 2015 average - likely another short-term anomaly. Were just these three countries to have had their imports at 2015 baseline levels, last week's storage build would have been a massive 7.1 million barrels. The gains seen in Venezuela, Kuwait, and other smaller trading partners that sent tallies above their 2015 averages may be at least partially attributable to a surge in Gulf Coast imports following delays caused by Tropical Storm Bill, and therefore, may decline in coming weeks. However, I expect the net change in imports to be upwards over the next month, putting further pressure on the supply/demand balance.
My rationale for emphasizing imports compared to US production and demand is that I believe that they have been artificially creating the appearance of a tightening supply/demand balance. Thanks to wildfires in Canada, Tropical Storm Bill interrupting shipments in the Gulf of Mexico, and unrest in the Middle East, imports during April, May, and early June (as shown in Figure 3) were depressed below the five-year average. This correlated strongly with a transition to storage withdrawals that helped to fuel the back-end of crude oil's 30% rally from the March low of $43/barrel to $61/barrel. Figure 5 below compares crude oil weekly storage injections/withdrawals to imports.
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Figure 5: Crude oil storage changes versus imports. There is a strong correlation between storage withdrawals between May and late June and a decline in imports. Storage injections resumed last week, following a surge in imports. This supports imports being the major driver of the domestic supply/demand balance over the past few months. [Source: Chart is my own, data from the EIA.]
During this same period (as shown in Figure 2), domestic production and demand remained relatively unchanged. As a result, I firmly believe that the decline in imports hoodwinked many investors into thinking that the supply/demand balance was permanently tightening, due either to increasing demand from cheap oil or declining production from the declining rig count, when it was really a temporary drop in imports. Now that imports have returned to a baseline level, this "masking" of the supply/demand balance has been lifted, and the result was a bearish injection similar to those seen during oil's springtime free fall - but during a time when the market expects withdrawals. It is therefore unsurprising that oil retreated to the tune of 4% yesterday.
What I believe to be even more concerning is that there is little room to go higher on the demand front. Refinery utilization - the percentage of US refinery capacity that is being utilized to convert crude oil to gasoline and other finished products - was at 95.0% last week. This is the highest refinery utilization during the final week of June over the last 10 years. Figure 6 below shows refinery utilization for the last week of June from 2006 to the present.
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Figure 6: Refinery utilization during the final week of June for the past 10 years showing that, at 95%, 2015's utilization is the highest of the decade. [Source: Chart is my own, data from the EIA.]
Furthermore, the maximum refinery utilization during any week in the last 10 years was 95.4%, recorded several times, most recently last December. As a result, at 95.0% refinery, utilization is nearly at its maximum capacity. The fact that we saw a 2.4 million barrel storage injection, with demand near its maximal level pulling hard at crude oil inventories and with imports still with room to run higher, suggests to me that oil still has room to fall.
Oil's 4% decline to under $57/barrel represented a major breakdown not only from a fundamental level, as discussed above, but from a technical level. During the 44-day period from April 29 to June 30, crude oil had traded within a tight $4.17 range between $61.43/barrel and $57.26/barrel, the narrowest range since March 2004. Oil broke out of that range yesterday. Figure 7 plots the price of crude oil over the last 3 months, showing the rally, range-bound action, and the breakdown yesterday.
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Figure 7: Crude oil prices over the last 2 months showing range-bound trading largely between $58/barrel and $61/barrel. followed by a breakdown yesterday. [Source: Chart is my own, data from the EIA.]
Now that oil has fallen below its 2-month support level, I would not be surprised if more investors head for the exits.
I continue to hold three positions betting on a continued downtrend in crude oil prices. I own a 10% short position in the popular United States Oil ETF (NYSEARCA:USO) - increased from 5% last week - a large 15% short position in the leveraged VelocityShares 3x Long Crude Oil ETN (NYSEARCA:UWTI), and a 5% short position in the Market Vectors Russia ETF (NYSEARCA:RSX). The latter provides short exposure to an oil-driven economy, as well as the turmoil encompassing Europe. The short UWTI position is a higher-risk play on leverage-induced decay due to choppy trading. USO, of course, is a safer direct play on declining oil prices.
Should oil drop to $55/barrel - which has long been my short-term price target - I will begin to aggressively cover my UWTI short position to protect profits in a highly volatile trade, which is currently up 20% and would likely be pushing 35% if oil reaches $55/barrel. I will likewise plan to close out my RSX short around the same level to lock in profits, should the European crisis appear to be resolving.
However, I plan to hold USO for the foreseeable future. Following yesterday's decline, contango in the oil futures market is again rising, with the 4-month spread up to $1.21, or 2.2%, after bottoming out at $0.86 last week. Should oil continue to fall, the contango will likely widen further, and I could easily see contango-generated returns topping 5% on a position held through the Fall. I feel USO is a safer, less volatile long-term hold than UWTI (despite the fact that UWTI triples the contango-generated gains and also benefits from leverage-induced decay). My price target to close out my USO position is currently $50/barrel. Factors that would likely cause me to cover sooner would include any socioeconomic forces that look like they would suppress imports for an extended period, or if US production (finally) begins declining in a meaningful way. As a result, my "stop" is a fundamental stop, and I do not have a specific stop price. Should oil rally in the face of the current bearish fundamentals, I will even consider adding to my USO short position up to 15%. If I had no crude oil short exposure, I would be reluctant to open a position here with oil down 7% in a week. Rather, I would wait for a bounce before initiating any position.
In conclusion, I believe that US crude oil demand and production remain in a stable, bearish pattern. Instead, the fundamental supply/demand picture is, and has been, dictated by fluctuations in crude oil imports. I do not believe that the underlying fundamental picture has changed since March, and that a return to baseline import levels last week following months of temporary suppression unmasked this persistent supply/demand imbalance. With crude oil demand unlikely to go higher with refineries near peak capacity, domestic production stable, and crude oil imports with room to go even higher, particularly from Canada and Saudi Arabia, I expect continued weakness in crude oil in the months to come. Once the summer driving season fades and demand declines, I would not be surprised to see the domestic oil surplus climb back above 100 million barrels over the next 1-3 months. Further exacerbating bearish sentiment are the possible resumption of Iranian exports and continued anxiety over Greece and the eurozone, although I believe these fears to be secondary to the ongoing domestic storage glut. My 1-3 month price target is $55/barrel, with a potential to drop as low as $50/barrel during this time. As a result, I plan to hold my large basket of crude oil short positions in USO, UWTI, and RSX.
Additional disclosure: As noted in the article, I am also short RSX and UWTI.