Option Investor

Oil Hits New Record High 

Printer friendly version

I could probably have copied my commentary from last week into this space and nobody would have noticed. Oil continues to hit new highs and nobody should be complaining. 

The major story for this week was the final emergence of the CNOOC bid for Unocal. The bid at $67 was $2 billion better than the Chevron bid at $60 but there are huge regulatory hurdles to cross. The bid ignited a firestorm of controversy and calls to have it vetoed for reasons of national security. The $67 bid by CNOOC represents $11.50 per bbl of proven Unocal reserves. 

Chevron announced they would not raise their bid because they had a firm agreement and it represented the best chance of completion. They obviously will wait until there is some danger of the CNOOC bid surviving before upping their offer. No reason to panic until the roadblocks begin to fall. Because there is a strong potential of Chevron eventually raising their bid the price of CVX stock fell over the last two days. This is why I added the new insurance put at $55 last week. We are well protected through September and can watch it play out from a position of relative safety. 

Another analyst speculated last week that the eventual loser of the Unocal acquisition could quickly turn their sights to Marathon as a potential acquisition target. For that reason MRO has found a bid and refused to dip with the other energy stocks this week. I did my research and I think they might have a point here so I am adding it this week. 

XOM dropped sharply this week by nearly -$3 with the majority of the drop in the last two days. This suggests to me it is a rebalance issue with the Russell. With oil closing at record highs and other oil stocks holding the line there is nothing to suggest a reason for selling in XOM. However, XOM has very large institutional interest and some could see $60 oil as a top and they are shifting out of slow moving XOM and into other sectors as the quarter ends. This could be a window dressing move. 

Boone Pickens said on Friday that we would see $3 gas this year and $100-$120 oil within five years. That scenario would effectively kill the notion for long-term investors that oil has topped at $60.

I removed EBAY from the watch list last week for lack of movement and it promptly fell to within 10 cents of our prior entry target at $34. Last week I mentioned plans for keeping the portfolio purely energy until the fall but I really think the factors surrounding EBAY warrant consideration by readers. I suggested a short-term call in the Market Monitor on Friday using the July $35 call at 95 cents. Leap Traders might want to consider the August calls at $1.90. Because of the potential for a late July market drop I would hesitate to hold the position more than a couple weeks. 

My EBAY reasoning is three fold. I believe much of the end of week drop was related to the Russell rebalance process and that pressure should be over. Secondly Ebay held its 10th anniversary convention this week and there were many new and promising developments hitting the wires. Thirdly and most important, David Faber on CNBC is doing an EBAY profile on the 29th just like he did on Wal-Mart several months back. They ran the Wal-Mart profile about a dozen times a week to start and are still running it as filler on the weekends. I believe the EBAY profile will fill every available time slot for the next month. This should provide strong investor interest and $34 appears to be a buying opportunity. 

If you took the DJX put trade two weeks ago and were not stopped out with me on the 10650 spike then you are doing very well. The put is up +40% from our entry price. I would be cautious next week as a bounce is possible. Everything came through as expected but that pesky spike took me out of the play. If we do get a rebound next week and into earnings I will be taking the trade again around expiration week in July.

Leaps Trader Commentary Archives