Winter arrived with a frosty bang and natural gas demand soared as well as gas prices. Natural gas rose +24% from Monday's low to close at $13.95 on Friday. Thursday's storage levels fell by -49 bcf indicating usage for the week at well over 100bcf. After winters four week delayed start the cold is settling in over most parts of the country and it appears it is here to stay.
The weather scale known as heating degree days is -20% below average for this time of the year. In general terms that means days where the average temperature was less than 65. For every degree under the 65 average it requires additional units of energy to keep living spaces warm. If the average temperature was 60 then it is said to be a 5 heating degree day. The scale allows energy forecasters to predict energy usage. Based on the weather forecast for next week there will be a lot of places in the U.S. where 65 degrees will be very wishful thinking.
The spike in gas prices produced a corresponding spike in crude with a close slightly over resistance at $59. This is encouraging but it is far from exciting. I related an historical fact in the option Investor commentary this weekend and will repeat a portion of it here. Historically when large institutional traders are long oil on Dec-1st by more than 40 million bbls there is a significant energy rally over the next 90 days. On Dec-1st those traders were long over 61 mb and very close to an historic high since the contract began trading. This should mean a good chance of a continued rally but it will also mean a substantial crash when it is over. As other traders climb on the energy train in December it will increase the number of long positions and those positions will need to be reduced in January. Typically positions are accumulated 90 days ahead of demand and exited once the demand cycle peaks. Despite the potential for cold weather in Feb/Mar I suspect January is the exit point for traders. This is fine since we have been planning on exiting in late December or early January for several months now. I personally believe that mutual funds are long energy stocks now ahead of winter and will take profits in January ahead of a potentially rocky stock market year.
The end of week energy rally did not come in time for Valero and Questar. Both were hammered on the Monday massacre and were stopped out. Valero went on to rebound to a new three week high on Thursday without us. While Valero is the volatility queen, second only to AHC, both took a backseat to UNH for the week. UNH had been declining daily for the entire prior week after setting a historic high at $61.65 on Nov-18th. There was definitely somebody sitting on the ask and the stock was pressured all week. On Monday there was some news in the sector about future medical expenses and sitting on the ask became past tense and UNH was dumped hard all day to close at $58.43. On Tuesday UBS issued a buy rating on UNH and the short squeeze was on. UNH closed at the high of the day on Friday and a new historic high at $62. It may not sound like much to have a $4 weekly range given the moves in energy stocks last summer but for UNH it was dramatic.
Real volatility of course looks like a chart from AHC. In the watch list last week I suggested for excitement to buy AHC on a break over $133 after it closed the week near $132. Some of us have been trading it for the last month with buys at $122 and sells over $130. That trend appeared to be about to end with an upside breakout over $133 but looks can be deceiving. AHC crashed on Monday to touch $120 on Tuesday's open only to rebound to over $127 on Thursday. Never a dull moment and the range bound trend appears to be alive and well.
BP and Shell signed their transitional agreements with Venezuela last week as the next step in losing their assets in that country. Venezuela decided last year that 15 oil companies operating 32 fields in VZ should turn over their assets to the state. This is just another round of nationalism as we have seen in other oil producing countries around the world. VZ decided it was not getting enough royalties off the countries oil and REQUIRED all these companies to tender their assets to VZ if they wanted to continue to operate. After signing the transitional documents the assets become a joint venture between the prior operating company and PDVSA, the state owned oil company. PDVSA will then inventory the assets and assign a value to the field. Once this value is determined PDVSA will tell the operating companies how much of a stake PDVSA will allow them to have in future production. Several companies including Petrobras, the Brazilian owned oil giant, have warned that the asset takeover could have seriously detrimental effects to future profits. No kidding. Venezuela has sharply raised taxes on these operating companies and declared new taxes on past production totaling billions of dollars. Needless to say the companies are under the threat of losing everything if they don't cooperate. I am sure some are just trying to stall for time in hopes of exiting VZ with the smallest possible loss. This kind of tactic by rogue governments will hasten the coming of peak oil. No foreign corporation will want to explore in VZ or risk any money spent on improving existing facilities. VZ claims production of 3mbpd but has been unable to meet this target for sometime due to the weakening infrastructure and lack of investment. VZ said OPEC was going to discuss a new price range for OPEC oil at the December meeting. Chavez has called for cutting production to push prices higher. With OPEC currently pumping at its maximum of 30.3mbpd and not able to build a cushion I doubt there will be a cut.
The OPEC president said he was going to recommend that production remain at 30.3mbpd despite the stated production quota of 28.0mbpd. He said they wanted to prevent any future price hikes. Sounds like everybody is not on the same page.
The energy rally returned most of our remaining plays to profit status as hoped and this trend could continue for a couple more weeks. As we get close to Christmas I am going to be making decisions about exit targets and year-end strategies but as always it will be based on price trends for oil and gas. We will be taking some short positions (puts) in early January in anticipation of a decline in prices into the March demand lull.
We are also working on a change in the LEAPS delivery process. Starting in January I will be able to issue entry/exit alerts on a daily basis as conditions change. Instead of leaving triggers open all week we will target them but enter only if the conditions are still right when the trigger is hit. Many times a trigger has been hit after a news item or some other event and I really did not want to be in the position given the new data. Hopefully this will give us the opportunity to manage the portfolio better and maximize profits. Yes, LEAPS are a long term investment but it all depends on your entry point. I want to be able to better pick those entries as the situation progresses.
For next week I hate to add any new entries with the expectation for an exit only 2-3 weeks away but I also hate to go into the winter with only six positions. I am going to make some suggestions in the watch list and maybe we can pick off a couple more on future volatility. Just be aware they will be short term positions.
Natural Gas Chart - 60 Min
Crude Oil futures Chart - 60 Min