Market Report for Friday, July 13, 2007

By S.R. Nunnally and Bryan Bottarelli

Market Report: The Next Move

Call it an unlucky Friday the 13^th, if you will. But I'm calling it a harbinger of more than one unlucky day.

All month, these technical formations have been battling each other out, but Thursday's 282-point rally officially blasted through the recent top…

Oil prices have climbed back above $73 a barrel today… on news that the International Energy Agency revised demand growth yet again.

This time, we're up to a 2.5% rise in 2008 compared to the 2.2% rise that was forecasted just a few short weeks ago (above the original February forecast of 2.0%).

In total, that means demand should be at 88.2 million barrels a day in 2008, up from 86 million barrels a day. Wanna guess where oil supply's projected to be?

Hmmm, even if the IEA hadn't upped its demand forecast, we'd have a supply cushion of only 400,000 barrels a day.

I don't even want to think about what a minor supply disruption would do to oil prices under those circumstances… and that's with a cushion! I'd be hard pressed to even estimate where oil prices would be in the heart of hurricane season next year with a supply deficit of 1.8 million barrels a day.

Call it an unlucky Friday the 13^th, if you will. But I'm calling it a harbinger of more than one unlucky day.

I've already raised my end-of-summer forecast for oil prices from $72.50 to $76.50. Based on this news, I should be thinking about raising it again.

I'll look at the charts, and get back to you with a firm number, but in light of this new demand growth, we could be seeing a test of last summer's highs: at or above $78.

I've been telling folks to take advantage of this move by looking at some smaller producers. Hold your core companies, like Exxon Mobil (XOM:NYSE) and Chevron (CVX:NYSE), but consider adding some smaller companies, like Petrohawk Energy Corp. (HK:NYSE).

I recommended HK to League of Wealth subscribers on March 2, 2007, and we're up more than 32% so far.

Enjoy those gains! And if you're interested in the League of Wealth, visit www.leagueofwealth.net for more information.

Over the last five trading days, we've witnessed the Dow sell off 148 points, which was one of the largest selloffs of the year.

And in the same week, we also witnessed the Dow rally 282 points, which was one of the largest rallies of the last five years.

If you look at a Dow chart, you'll notice a clear Double-Bottom formation that occurred in mid- and late-June. At the same time, you'll also notice a Triple-Top formation that occurred in June as well. All month, these technical formations have been battling each other out, but Thursday's 282-point rally officially blasted through the recent top -- and this signals more upside to come. Continue to bias your trading positions to the upside.

At the same time, we also have crude for August delivery approaching $73.50 per barrel. In fact, contract prices briefly touched $73.80 on the New York Mercantile Exchange yesterday, a level we haven't seen since September 5, 2006.

As you read in Sara's piece above, the recent oil demand revision (which revised the 2.2% growth up to 2.5% growth) means that oil demand will outpace oil supply by 1.8 million barrels a day. Because of this demand revision combined with a market that's pushing higher, I remain bullish on the major oil refiners. But oddly enough, two of my favorite refiners have been lagging in recent trading action -- and I consider this a strong buying opportunity.

Valero Energy (VLO:NYSE), for example, has 967 retail sites in the United States. With trailing three-month revenues of $89.80 billion and a trailing P/E ration of 8.40, the stock looks very cheap on all levels. The stock actually traded lower during yesterday's 282-point rally, so I like picking up some shares at these levels.

Tesoro Corp. (TSO:NYSE) is another strong oil play. As of May 3, 2007, TSO operated six refineries in the western United States with a combined capacity of 560,000 barrels per day plus 600 retail stations. With trailing three-month revenues of $18 billion, it's certainly not as cash flush as VLO, but its trailing P/E of 9.44 also makes it a strong buy at current levels. Just like VLO, TSO also traded lower in yesterday's action -- and with the stock hugging to the 50-day moving average it looks like a good time to buy.

Bottom Line: Take a good look at VLO and TSO, which have not rallied alongside other oil names recently, and feel free to buy them at current levels.

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