Option Investor

Is The Party Is Over?

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They say the party is not over until the fat lady sings but in this case we are going to substitute Boone Pickens as the singer. Pickens appeared on TV this week saying that the delay of colder weather for nearly a month allowed gas supplies to build to comfortable levels and prices are now headed down. Nothing new to us because of the close watch we keep on the weather and gas demand but it appeared to be news to traders and they fled in panic.

Pickens said gas prices could decline to $9 and oil could decline to $53 before summer demand arrives. OPEC countered that oil prediction saying that they would cut production after January if prices fell any further. I have mentioned in the past that I thought OPEC would defend $55 on light crude. Any oil headed to heating oil sales in Jan/Feb is already on its way to us from OPEC and prices now reflect expectations for demand in the March/April time frame and the early spring demand decline. Pickens also said oil would hit $100 before the decade is out but reporters tended to under report that claim.

Gas storage levels declined -162 billion cubic feet in the report released on Thursday and many analysts had expected a draw of over 200 bcf. Analysts now claim that electric plants with switching capability were moving back to coal in the face of the high cost of gas. We heard confirmation from the Norfolk Southern Chairman on Friday that coal demand was stretching the limits of the railroads and there was a shortage of rail cars to carry it.

Gas prices fell to close at $12.28 on Friday with no cold fronts in sight. The holiday weather forecast is mild and consumption is likely to be well below levels seen the prior week. How much week-splitting we will see on the inventory report is unknown. We could see another sharp draw if the last bit of cold weather crossed weekly reporting boundaries. Regardless of the draw down the ramp for gas prices is likely over. The two coldest months of winter are still ahead but with supplies comfortably over the five-year average it would take a new ice age to cause a shortage. A massive draw of -250 bcf per week through February would severely dent supplies but leave nearly 1,000 bcf as a cushion. I seriously doubt any weather scenario that would cause those kinds of draws.

I believe we have seen the peak in oil/gas prices for December and once into January the decline in energy stocks could be significant as we head into the March/April lows. While this will take most of the energy plays out of our portfolio it will provide a great buying opportunity for some long term holds into the fall of 2006. The long term plan has always been to exit energy by the end of the year but I was hoping for one more weather bump.

In preparation for some energy exits I am adding a couple non-energy plays as we head into some possible January volatility. We got a textbook entry on the Freeport McMoran gold play last week when FCX pierced our $52 trigger point by -6 cents.

We also escaped a bullet on UNH when it traded down to $61.03 on Monday with the stop at $61. The rebound was swift and a new high was made on Wednesday.

I am going to keep the commentary short this weekend due to holiday concerns but will make up for it next week with an outlook for 2006 plays and market expectations.

Check all the plays for updated exits as we approach Dec-30th.

Merry Christmas and Happy Chanukah!

Natural Gas Chart - Daily

Crude Oil futures Chart - Daily


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