Option Investor
Commentary

Oil's Well That Ends Well

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I thought for sure that last weeks dip would trigger entries in several of our watch list candidates. Unfortunately, despite the severity of the drop only one candidate dipped low enough to be triggered.

The good news was the oil rebound on Friday. As painful as the dip was the rebound erased nearly all the profit taking in only a single session. Hopefully it was not just an oversold bounce and we will get some follow through and some new highs next week.

Earnings on energy stocks are beginning to flow and OXY led the list on Friday with nearly a +100% profit increase over Q2-2004. I expect this is the type of performance we will get from the companies in our portfolio with the exception of Valero. As a refiner they are immune from the new highs in oil prices but are guaranteed a profit in any market. VLO earnings are expected to grow by +13%.

Chevron raised its bid for Unocal and the board blessed it again ahead of the August 10th vote. CNOOC appears to have lost interest given the growing political opposition. They would have to bid much higher, give some strong guarantees and face a long grueling political fight. Chevron actually rose on the news of the elevated bid as investors saw the end of the battle approaching fast.

The end game for our current portfolio is also approaching. I am speculating that we will get one more really strong demand driven rally into the fall. Once it appears a heating oil crisis and a shortfall in inventories has been averted I expect prices to weaken in anticipation of the spring demand slump. This is when I expect to exit the majority of our oil positions. Depending on how the data flows it could be in the late September to November time frame. I still recommend adding to positions on any dip like we had last week but everyone needs to understand that there is a peak ahead and a planned exit. I will update everyone with my thoughts as we approach fall.

I suggest everyone read my weekend commentary in the Option Investor Newsletter this weekend. I quoted some more research on the eventual arrival of the Peak Oil crisis.

I can't tell you how nice it was to see my energy positions come rocketing out of this week's drop. I am sure everyone else felt the same. Once equities in general begin their anticipated summer decline into the Sept/Oct dip we should see energy stocks rally as a safe place to park money until Q3 earnings.

Hurricane Emily failed to cause any serious damage to the U.S. although Mexico lost a considerable amount of production while waiting for the storm to blow over. Franklin is now moving away from the U.S. and will not come anywhere close to the Gulf oil fields. This is a record for named storms this early in the season and we can bet that there are more headed our way. Just another profit opportunity in my opinion.

December Crude Chart - Weekly

December Natural Gas Chart - Weekly

 

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