Option Investor

Nice Support

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What a week! The expiration of the April contract gave us quite a scare on Monday with a -2.50 drop in oil. However, that was quickly erased as buyers rushed in at support, now about $61.50 and pushed prices back over $64 by Friday's close. While the speed of the drop surprised me the buying at support did not. I hope everyone was able to add to positions at that level.

This was an interesting week for energy stocks. We had more bad news from Nigeria, Bolivia, Venezuela and good news from Saudi Arabia was completely ignored. The Saudi news was the dedication of a new oil processing plant that will add 300,000 bpd of output to their current production. This was completely ignored in the mainstream press as they focused instead on the problems in Nigeria. Eni SpA declared force majeure last week on a Nigerian oil pipeline that was attacked my militants. The 75,000 bpd pipeline is expected to be back in service sometime next week but it is just one more increment of production taken offline by the group, which has vowed to remove one million bbls per day from production.

Due to end of quarter tape painting I would not be surprised to see the price of oil break the $65.50 barrier but I am expecting this to be a temporary event. The first week of April could see some profit taking or window undressing. We are approaching the summer driving season and gasoline demand is rising along with the price of gas and diesel. It may still be too early for the summer ramp to begin and that could provide some weakness.

However, the refiners are already taking off on the anticipation of higher demand and fatter spreads. I am giving up on Holly (HOC) on the watch list. We were stopped out by dip on Feb-14th at $56 and I have been chasing ever since. It has rebounded to hit $72 on Friday. Frontier Oil also escaped back in February and has gone on to hit a new high on Friday. Sunoco was breaking out of its recent congestion the prior week but was hit with an analyst downgrade on Monday that knocked -$4 off the stock. That has nearly been recovered with buyers coming back into the stock. Valero hit a new two-month high last week and is gaining speed.

Our transportation pick, coal car manufacturer, RAIL, recovered from that early March weakness that gave us an entry and hit a new historic high on Friday.

You may remember Titanium Metals from the choppy session we had back in February. It has recovered post split and hit its all time high on Friday. I am not going to add it due to the already heavy play list but I own it and I think it is about to make a breakout. Of course mentioning it here will be the curse of death.

Natural gas is surprisingly strong with the December contract closing well over $10. This is helping gas stocks like UPL, CHK and ECA because gas producers can hedge into the higher prices. They can sell contracts for future delivery much higher than current spot prices.

It is entirely possible we are about to see a gas implosion like we saw in oil last week. The current futures contract for gas expires on Tuesday just like the April oil contract did last week. Oil sprinted higher on the Friday before and then imploded on expiration. On Friday of this week gas hit a four-week high and could be primed to repeat the plunge we saw in oil as traders shift into the new front month contract.

This is going to be a short commentary this week after the short book I wrote last week but there is little change in the outlook. Oil and especially oil stocks are rising and next week is not expected to change. We may need to make some adjustments next weekend just in case we do get some end of quarter tape painting. It might be a good opportunity to sell some more calls. The ones we sold last week are in serious danger of being stopped out due to the amazing rebound. We have to play the cards we are dealt and then adjust the following week.

I have egg on my face this weekend. I had listed in the Haliburton play that they were splitting 2:1 on March 23rd. That was incorrect. They announced the split and an increase in the dividend at the same time and it was the dividend that was to be payable on the 23rd not the split. They announced that the split needed to be approved by the shareholders at the meeting on May 17th. Seems we have a long time to wait for that split to occur. Fortunately HAL is about to break resistance at $72 and start a new uptrend according to this weekend's chart. Let's hope it works out that way.

May Crude Oil futures Chart - Daily

December Crude Oil Futures Chart - Daily
(390 min to remove bad ticks)

April Natural Gas Futures Chart - Daily

December Natural Gas Futures Chart - Daily


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