Option Investor
Commentary

Curses, Foiled Again

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Oil prices were headed south once again after Debby turned away from land. Then Ernesto suddenly appeared in the Caribbean with a track that would take it right across the oil patch with a bulls eye on New Orleans. Prices spiked back up again and will probably remain just below $75 until it is clear if Ernesto packs a punch or turns away from the oil fields.

That scenario postponed the drop in oil we were expecting and put our watch list back on hold. Our time will come and we will just have to wait for it. With the volatility in the energy sector we do not want to be chasing entries. If Ernesto fails to produce any damage I still believe we will see numbers below $70 to as low as $65. That will be seen as an implosion in oil and stocks should decline as well.

I have not finished my review of the energy conference but one of the companies I like was upgraded by Merrill Lynch on Friday. That company is XTO Energy and it is on our watch list. It may be a lot harder to get that entry now that it has spiked a couple dollars higher. To listen to their presentation click here: http://tinyurl.com/rvxmr

Coal continues to be ignored even though gas prices have been rising. BTU can't find a bid despite being the 800lb gorilla in the sector. BTU has support at $44 and it is clinging to that support. This would be a good spot for a new entry if you are not in the position. Walter Industries surprised everyone last week with a breakout of the prior resistance and a move back to $54. This coal company has other interests and it appears they are being noticed. We were triggered on the breakout and Walter is now an active play.

I am amazed by the lack of buying in the gas companies like UPL, CHK, ECA, EOG, XTO and DVN. They are all hedging gas in the $8 to $10 range for 2007 and beyond and producing it for something in the $1.50 range on average. I keep hearing analysts saying there is no upside because of the hedging but current profits are still very strong. Several of the companies at the conference had hedged as much as 75% of next year's production already. Any new production will be hedged at 2008 prices. It is a very safe way to lock in profits and protect against a sudden change in climate. Even if gas goes back to $12-$15 there is always new production to sell at those rates. UPL is my favorite gas play and it is on the watch list. Listen to their presentation here: http://tinyurl.com/jzvv8

I am going to keep it short this week because we are handicapped by the pending arrival of Ernesto. Until that event passes we will not likely have any new positions triggered on the watch list. The plan has not changed although the wait can be unpleasant.


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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