I hate to keep spending so much ink on discussions about the state of the oil sector but with the majority of out plays in that sector it deserves being a constant subject. Oil rose, fell, rose, fell all week and closed just under $54 on worries that OPEC will raise production quotas next week. Not that it will do any good but it has the appearance of more oil on the market. OPEC is currently producing at near capacity and pumping about 2.5mbpd over quota. Just raising that quota will only put the stamp of approval on that level of production.
OPEC says it wants to build up an inventory backlog to prevent the expected end of summer demand spike from pushing prices into the stratosphere. However, with demand rising on a global basis that hope may be in vain. In my market wrap this weekend I mentioned several facts about China and their oil problem so I won't repeat them here but it is safe to say the problem is only beginning.
Most of the oil stocks fared better than oil prices in general for the week because another quarter has passed with above average earnings. This lowers the effective PE for the oil stocks and makes them a better value. Add in the expected over $60 oil prices this fall and profits will be rolling in even stronger.
In the news on Friday Chevron announced the FTC had approved the Unocal acquisition. Also in the news was a strong rumor that CNOOC, China Oil, was prepared to make a stronger bid for the Unocal assets. This failed to dampen enthusiasm for Chevron and it closed at the highs for the week. Chevron was depressed in April from the acquisition news and is trading well below its peers. Once the acquisition is complete Chevron will control 11% of U.S. gasoline production. This should give Chevron wings once the acquisition is complete.
On the bright side Conoco and OXY rallied to new all time highs and appear ready for a strong breakout.
Kirk Kerkorian must be feeling pretty happy this weekend after his GM play produced about $100 million in profit in only a few weeks. KK owned about 10 million shares when it was trading at $27 and he made his tender offer for $31. That produced a nice $40 million profit regardless of whether anybody tendered at the higher price. When the smoke cleared there was an additional 19 million shares tendered at $31. The news on Friday that the UAW had agreed to talk about healthcare expenses sent GM over $35 intraday with a $34.50 close. That produced another windfall profit for his new 29 million share position. Unfortunately it stopped us out of our GM put for a nice loss. Let's petition KK for a donation to cover our loss. I believe he can afford it.
I am still allergic to adding any further long leaps given the calendar and a full portfolio. I will make some suggestions in the Watch List section but I am not making them actual plays.