Option Investor

Expiration Week Blues

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Oil prices imploded last week from their high of $77.45 to a low of $69.60 on Friday. This massive -10% drop was the result of an end to the conflict in Lebanon, news that BP was going to keep 200,000 bpd flowing from the west field and expiration of the September futures contract. The contract does not end normal trading until next week but most traders exit the week before trading ends.

The sharp rebound from strong support at $70 could have been a combination of short covering and plain old dip buying after a -10% correction. I am very tempted to buy the dip as well but I would rather see what happens on Mon/Tue before stepping into the traffic.

I attended a weeklong energy conference last week and NOBODY expects any material drop in oil or gas prices. (See the Option Investor commentary this weekend for a lengthy description of the natural gas outlook) I though I was going to be able to summarize the conference by this weekend but there was far too much data to cover. I am going to prepare a report on the conference and the top ten companies over the next week or so. Until then I will just hit some of the highlights.

Natural gas was seen as undergoing a half price sale and companies are scrambling to find assets to purchase before prices go higher. Oil is rapidly going on the endangered list with nearly all the exploration companies moving their focus to gas rather than fight for the few remaining oil fields on the planet. According to Petrie Parkman 77% of all remaining oil reserves are now in the hands of national oil companies like Rosneft, PDVSA, etc. Equity participation is either not allowed or terminally stupid. An additional 11% is held by national oil companies like China's CNOOC which allows equity investment through stock. How long that investment will be rational is yet another matter. Once Peak Oil arrives your investment will likely be eradicated. Another 6% of global reserves is held by the new Russian oil companies where your investment could be erased by a tax lien on any given day. Only 6% of global oil reserves are available for open access to anyone willing to spend the money to develop them. This makes the playing field for the super majors like XOM, COP, CVX, CEO, PBR, PTR and others VERY crowded. With everyone trying to get a piece of a shrinking resource the price for leases is skyrocketing along with the cost of development since most available leases are in very inhospitable environments.

This makes exploration by independents in those areas almost impossible. Independents are forced to refocus on gas plays where there is still sufficient supplies to be found in friendly territory to make the plays worth the investment. Unfortunately the world runs on oil and according to the Petrie Parkman chart below there is very little spare capacity. Those national oil companies (NOC) may control all the oil but they control very little exploration capital. Those countries are strapped for cash and fields are declining rapidly. Oil production is currently around 85 mbpd but spare capacity is less than 800,000 bbls and those barrels are mostly heavy crude. I will expound on the rest of the oil and gas story in the report I am producing.

World Oil Production and Spare Capacity

For this week I am adding one company I saw at the conference that I though was strong enough to withstand any future drop in oil prices. That company is ATP Oil and Gas. They are not a normal exploration company and their presentation was compelling. Check the play description for a copy of their presentation.

I am going to update the potential entry points on the various watch list plays and we will start actively targeting them on future declines in oil prices.

There are no hurricanes on the horizon and we are facing the end of summer demand drop. Oil prices could break that $70 level if it appears Iran is going to take another month of so to reach a boiling point. I want to buy that dip when it occurs.

September Crude Futures - Daily

October Crude Oil Futures Chart - Daily

December Crude Oil Futures Chart - Daily

December Natural Gas Futures Chart - Daily

September Unleaded Gasoline Chart


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