Option Investor

Slip Sliding Away

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The month long slide in crude was greased again when Florence turned northward toward Bermuda. There are no storms forming in the Caribbean and gasoline demand season is over. It ended with one last spurt of demand that was +600,000 bbls over the same week in 2005. Katrina skewed that comparison in 2005, which cut demand considerably along the coast.

For the last two months I have been avoiding new energy positions while oil climbed higher. I promised everyone that the price would fall in late August and early September and that prediction is coming true. October crude is -$13 off its highs and closed at $66.25 on Friday. I was targeting $65 as our first test of support with $60 as a secondary possibility.

We are very close to entries on many of our watch list positions and we were triggered on Petrobras on Friday. Ironically Petrobras fell after the monster discovery by BP/CVX in the deep waters of the Gulf. Petrobras has a lot to gain from that field and owns quite a lot of acreage along with APC, XOM, and RDS. We got decent entry on a strong stock. No complaints there.

OPEC meets Monday and Iran and Venezuela will be asking for production cuts to hold prices at $65. I seriously doubt it will happen but anything is possible. Most OPEC members are already pumping at full capacity due to declining capability. They need every dollar they can generate and while cutting back on production may raise the price they depend on those thousands of bbls per day of output to cover economic problems and new exploration. I believe the outcome will be a public "no change" statement but a private and silent agreement by a few to slow slightly to maintain the price.

Natural gas prices fell to $5.65 at Friday's close and are starting to attract attention from investors. The growing supplies of gas in storage surged by +71.0 bcf last week to 2976 bcf and +12% over the five-year average. With maximum storage commonly assumed to be 3.2-3.5 tcf that only leaves 3-4 more weeks of maximum injection before reaching the initial threshold and forcing pipelines to restrict further injection. This will force some gas on gas competition for price and could further pressure prices. This late September, early October dip is being looked at by investors as a buying opportunity for gas stocks. Assuming we have a normal winter supplies would be reduced enough by spring to push prices back over $10 according to energy analysts. One producer was targeting $12.50 for next summer but that may be wishful thinking unless old man winter blows really hard. We already have UPL on the watch list but I am going to add a couple more gas stocks over the next couple of weeks. The drop in gas prices forced coal lower and BTU hit our exit stop. After looking at the sector again I decided to close Arch Coal as well while we are still close to a breakeven. With the gas prices going lower coal will be sure to suffer. I kept Walter because its very high quality coal is not used for electricity but for other purposes.

I received an update from ASPO this week and thought it was worth passing on. It criticizes the rosy estimates of oceans of oil by CERA and the IEA. Read it here: http://tinyurl.com/gwrzu

I am expecting a busy week ahead if oil prices tick just a little lower. We should get fills on several targets and start filling out the portfolio again. Keep the faith! Oil companies are still being valued at $35-$40 oil and I seriously doubt we will ever see $50 again. Every major dip is a buying opportunity for long term holders. Hopefully we can get some entries before a late season storm appears in the Gulf.

October Crude Oil Futures Chart - Daily

December Crude Oil Futures Chart - Daily

December Natural Gas Futures Chart - Daily


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