Option Investor
Commentary

December Oil Hits $63

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After the drop last week to $58 the oil bears had begun to crawl out of the forest. They were quickly sent scurrying back to their dens as multiple news items provided strong support.

Earnings from energy companies were spectacular to say the least. Many posted earnings in the 30% to 50% range with several turning in a 100% increase in profits. With the rest of the S&P averaging 9.8% it proved once again that energy is where the action is once again.

Add in strikes, fires, drops in inventory levels and an admission by Chevron that proven reserves were down -11% from 2004 levels and the stage is set for a classic Q3 feeding frenzy. Those investors seeing the obvious signs are buying every dip and several energy stocks hit new highs again last week.

Alas, regardless of how sweet 50% or better earnings can be many traders took profits and moved on to find greener pastures. Well, maybe not greener pastures but at least a different trade. Profits are not profits until the position is closed. That is fine for us as it offers yet another entry point for some of the high flyers.

The high flyer for the week was not a current play. HP, not the computer company but Helmerich Payne, soared from $50 to near $58 on strong earnings. Needless to say option premiums are excessive. We will wait for it to pull back to the 100-day average on the 30 min chart for a potential entry. Fueling the rise in drillers was news that new rigs were being commissioned by all companies, some with three-year contracts in place before the rig is even built. The gold rush is on for the drillers and historically the cycle runs about two years before oil companies give up in disgust from too many dry holes. Oil over $60 is causing those previously risk adverse companies to place large bets again.

There was a fire at the BP Texas City refinery, the third largest in the U.S., and another on a BP rig in the North Sea. A third fire hit at a Murphy Oil refinery in Louisiana and the combined news sent oil soaring on Friday. Analysts fear that refineries are being pressed too hard to pump out products with capacity utilization reaching 97-98% with no room for down time for maintenance. A major refinery outage could easily produce severe shortages of products within the U.S.

All of this brings us back to the current portfolio and where to go from here. I plan on exiting most of the LEAPS in late Q3, early Q4 once the heating oil demand spike has passed. Until then I still expect prices to continue higher. We may have another week of price pressure as traders take earnings profits but I would view it as another buying opportunity.

I am dropping XOM this week as a non-performer after they failed the earnings test. How a company with $30 billion in cash and 26 billion bbls of reserves can fail earnings is unbelievable. XOM missed estimates by a penny despite turning in an amazing $5.8 billion in profits for the quarter. It said share buybacks in the current quarter could reach $5 billion. That is all great but when you have 6.5 billion outstanding shares it did not move the stock. XOM closed at the low for the week at $58.81 and only 31 cents above our stop. XOM is a great company generating fantastic earnings but it is so big it can't get off the couch much less spring higher.

Natural Gas futures rallied to close at $8.94 on Friday and just a heat wave away from a new all time high over $9.00. The gas shortage is going to hit the U.S. hard if the hot summer continues and a cold winter hits those depleted supplies of natural gas. Chesapeake said last spring that we were only hours away from a gas shortage several times over last winter. As more gas fired electric plants are built the demand will continue to grow faster than the supply.

What we need next week is a new hurricane or some event to give oil one more boost. We need some catalyst to slap new life into the energy stocks and produce a snap back from their post earnings swoon. Hopefully there are funds waiting to put next weeks new money into these stocks on the dip. Next week is contribution week for funds and all should be receiving new cash.

December Crude Chart - Weekly

December Natural Gas Chart - Daily

 

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