Option Investor

Volatility Returns

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Considering how volatile oil was for the week I am surprised we did not lose more positions then we did. VLO, SUN and NOV hit their stops and were closed. Meanwhile MEE, BTU and CNX continued to thrive with new highs all around. While oil stocks were weak the coal and gas plays continued to be strong with coal taking honors for the biggest gains.

The price of oil retreated on Friday to close at $63 and right at strong support. Many of the oil issues were seen rising into the close as though preparing to get an early start on Monday. It could have been due to the S&P rebalancing and not just a bid under oil. We will not know until Monday.

One thing everyone needs to keep in focus is that oil stocks don't have to go up just because oil goes up or down. Oil stocks are captive to the broader market and should the historical September weakness appear next week there is nothing to keep oil stocks from falling as well. Crude could be climbing but if the markets are crashing oil stocks will follow. However, without any material bias any gain in crude should translate to a gain in energy stocks and a corresponding gain in the markets. You can't have 350 energy stocks moving higher on crude without seeing the broader indexes reflect that move. Remember, I said in a market without any "bias" and next week is not likely to be that market.

With the Fed meeting on Tuesday there is likely to be lots of bias once that meeting is over. Current consensus is for another hike of +25 points but the door is open to anything from a pass to a +50 point hike in light of recent inflation information.

The IEA said it was not going to extend the amount of oil released to the U.S. or the extend the timeframe so the worry is going to quickly come back to U.S. production and everything we can import from commercial sources. With gulf oil production still 56% offline and gas -34% offline every day brings us closer to that choke point where demand will exceed supply and refineries will have to start paying up again for light sweet crude.

Encana dumped an albatross last week and sold its Ecuador property to China for a fat price. The deal was officially to Andes Petroleum but that is a front for China. Seems they feel they can get more done by using the appearance of locally owned companies. Occidental also has property in Ecuador and could be the next to announce a deal. The problem with Ecuador is the current political unrest. Production has been sharply curtailed by protestors and attacks on oil assets. Encana was smart to take the quick exit and a fat check. You don't suppose China had anything to do with the recent increase in attacks? Maybe I have watched too many movies where the potential buyer makes things tough for the current owner to induce them to sell.

We are getting close to the period where the energy stocks will start announcing guidance upgrades and it could be very healthy for stock prices. I would rather they wait for a bottom to announce rather than just before the drop.

With the markets likely to be volatile with a downside bias this is a week to snug up stops and try to exit with a profit if oil decides to retest the 100-day average at $60. While this would be a good buying opportunity I don't want to give up current profits on the way down.

Snug up those stops and don't let any money slip away.

Crude Oil Chart - Daily


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