Option Investor
Commentary

OK, I Give Up

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This was an extremely frustrating week. The oil crash on Tuesday after the $1.4 billion block trade in XOM and the crash on Thursday when oil fell more than -$2 on futures dumping. Thursday was the last day of trading in November futures and rumor has it that Refco had billions in positions for themselves and clients. These were dumped rather than rolled forward due to their current operating condition. Whether this is true or just a rumor there was a large number of futures contracts sold with more December
Contracts sold than November.

Regardless of the reasons we were knocked out of all but one position when oil prices came crashing down. Several were stopped out by only a few cents. Most frustrating was Peabody Energy. BTU soared to $83 on Monday just ahead of earnings on Tuesday. BTU reported earnings that doubled the prior quarter but missed analysts estimates by a penny. There was no mercy and BTU fell from $83 to $72.45 and stopping us out at $73. Unbelievable!

Fortunately the losses were minimal because of the close stops. EOG and DVN were the worst at just over $2 with the rest right at $1.00. I am sure many more energy investors suffered much more than that.

UPL -1.20
CHK -1.25
EOG -2.20
DVN -2.10
TSO -1.20
NOV -1.00
BTU -0.10

Now that the slate is clean and energy earnings are next week I shudder to add anything back into the mix. We don't know what earnings are going to bring other than analysts expect something in the +70% range overall. +100% did not help BTU so I have no confidence in taking new positions ahead of the news. Hurricane damage and lost production will be on the top of the list of charges and traders have already shown no mercy for hurricane survivors.

These are some of the expected results from the top guns in the sector.

XOM, Exxon Mobil the largest oil company reports on the 27th and is expected to earn +$1.36 for only a +45% growth over last year.

CVX, Chevron Texaco, number two behind XOM is expected to report +1.92 and a +40% growth from 2004. CVX reports on the 28th. Chevron has suffered greatly from the hurricanes with two refineries knocked out and one still crippled from the blow.

COP, Conoco Phillips, reports on the 26th and is expected to report +2.56 and a +79% jump in earnings. Revenue should be over $52 billion.

AHC, Amerada Hess, also reports on the 26th and is expected to report +3.32 for a +91% growth over last year. Sales are expected to have jumped +59% over last year.

MRO, Marathon, reports on the 27th with estimates of +2.76 for more than a +200% gain. The company has already warned that production fell -20,000 bpd in Q3 due to Katrina.

APA, Apache, reports on the 27th and is expected to earn +$2.31 or +76% on a +42% jump in revenue.

APC, Anadarko, reports on the 28th and is expected to post +2.88 for only a +15% earnings growth. They must feel like the black sheep of the sector.

SLB, Schlumberger, reported on Friday with +86 cents, up form 53 cents in the comparison quarter for +67% growth. SLB said they lost 25 days of operations due to shutins in the Gulf and would have reported +6 cents higher without the hurricane impact.

ECA jumped from $46 to $55 on rumors that Shell was interested in buying the company for $65. The rumors turned out to be untrue but they did save us from being stopped on that position.

I looked long and hard this weekend and tried to find something to add for any energy pop next week. Unfortunately everything has a declining chart and/or an earnings announcement next week. Both are not conducive to an entry.

I feel like I am naked with only one position so I am going to add BTU back to the portfolio. Since they have already reported a +100% earnings gain they should be safe from further oil carnage. We were stopped out by 55 cents and that is where the drop stopped.

I mentioned in the OIN commentary this weekend that oil had fallen to strong support at $59 on Friday and rebounded to $60.63 at the close. That $59 level is a very strong support level and a perfect place for a rebound to start. The 100-day average has only been tested three times in three years and all three were in the last 12 months. The 200-day average has not been tested since Feb-2002 and is currently at $57. I believe the risk is minimal unless the entire Q4 demand cycle has imploded and oil breaks that $59 level.

Oil and gas from the Gulf was showing higher shut in rates on Friday as some companies chose not to take the weatherman's word for direction on Wilma. Evacuating 4500 workers in the event Wilma continues north instead of moving east would be very hazardous in a short time frame. Normally they have a week to exit but a failure to turn east would only give them 24-36 hours to make all the pickups and the weather is not likely to be good.

Natural gas is holding over $13 but an unexpected jump in reserves on Thursday put fear into the gas stocks. Nov-1st is the normal beginning of the winter demand cycle and the initial draw down of supplies. If the winter cycle goes as expected the price should begin to climb in November.

I reviewed the setups from last week and I would still take the entries today if the same circumstances existed. Also, some of those entries were from the watch list from two weeks ago when oil was rebounding from $61 to $64. It is unfortunate that we were stopped out two weeks in a row but sometimes it just doesn't work out the way you planned it. Next week we should have a lot more options and hopefully some better vision on the direction of demand into the winter months.

Jim Brown


Natural Gas Chart - Daily

Crude Oil futures Chart - Daily

 

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