Option Investor
Commentary

End In Sight?

HAVING TROUBLE PRINTING?
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It has been a rough two weeks but hopefully the end is in sight. The rebound in oil on Friday to close at $53 was more short covering and profit taking ahead of the long weekend than anything else. The support at $55 broke and now the odds are very good of a test of $50 before any meaningful rebound.

Volatility is likely to increase next week with the expiration of the February futures contract on Jan-22nd. That leaves only five days for that contract to trade. With the sharp increase in the number of shorts I am hoping that means we will see some short covering but we never know. There are still a lot of longs even though the short positions have increased. Keep your eye on the market and should we get a test of that $50 level on expiration volatility it could be a buying opportunity in my opinion.

Another factor impacting oil was a rebalancing of the Dow Jones AIG and Goldman Commodity Indexes. They changed the weighting of the components causing all kinds of havoc in the trading community. There were some really big moves as institutions were forced to alter positions significantly to match the new index weightings. This should filter out of the markets by next week and everything go back to normal. Unfortunately there is no definition of normal that fits the recent price action.

I sent out an email on Thursday night to all subscribers suggesting that the end was near and I thought it would be a good time to add to positions. I still believe that despite the fact we may test $50. You can never tell when traders like us will jump in early and prevent a lower low from forming. Either way the difference in option prices from Thursday night's close of $52 and a test of $50 would be minimal.

I am sure many traders noticed that most oil stocks quit falling earlier in the week and began trading sideways or higher. Several have a nice 3-day uptrend in progress all ready.

Nothing has changed in the OPEC outlook since Thursday night. They are making noises about another meeting, another cut, cuts from non-OPEC nations and whining about those members who did not cut in November. The bottom line still comes back to them. The OPEC ten must follow through on the promised cuts regardless of the financial pain. If they had done it two months ago it would have been a lot less painful. If they do it a month from now it will be even more painful and they know it but they are addicted to our dollars and cannot force themselves to diet. Information out on Friday suggested they actually increased production by +350,000 bpd to offset the loss in income from the reduced prices. That dog won't hunt and they are going to be chasing prices until the next ice age if they don't take a stand.

Conoco confessed they don't have any exploration prospects by announcing a $1 billion stock buyback this week. That equates to 15.6 million shares and will reduce their market cap from $105 billion to $104 billion if the share price stayed the same. That is hardly a wise use of their cash. It would be much better put to use buying up leases or bidding on new blocks to explore. Oh, right, there are not any new blocks with big deposits just waiting to be found. Just a lot of small deposits that the majors don't feel justify their effort. It is easier to just give the money to shareholders while their company assets dwindle away. Rant off!

Next week begins the earnings cycle for energy stocks with SLB on Friday. They should report decent earnings and give the other service companies something to shoot at.

Murphy Oil warned on Thursday that earnings would be between 40-45 cents per share. Analysts had predicted 65 cents. Dry hole charges were expected to be $70 million including one for $22 million for a failed test at Bata Kapur offshore Malaysia. This just proves again that finding oil is not as easy as those armchair experts think. A company like Murphy has the best intelligence and seismic available and they still suffer dry holes from trying to extract oil where there isn't any.

Production at the Hibernia platform off Canada's east coast was cut in half from 180,000 bpd to 100,000 bpd by the failure of an electrical generator. It will take 8-weeks to correct and cause a loss of 4.5 million bbls of production. Heck, that is more than several OPEC nations agreed to cut. The field is owned by Exxon (33.125%), Chevron (26.875%) Petro-Canada (20%), Murphy Oil (6.5%), Hibernia Holding (8.5%) and Norsk Hydro (5%). Lots of owners shares the risk but also limits the individual profits. Of course any platform pumping $10 million in oil per day can afford many owners.

A little platform trivia:

The Hibernia platform is the only platform in the world designed to survive a collision with an iceberg. Because of the frequency of icebergs in this area a platform support vessel has been configured to "lasso" icebergs and tow them out of harms way. The platform crew numbers 185. It went into operation in 1997 with a rated capacity of 230,000 bpd with an estimated recovery potential of 615 million bbls. Natural gas produced with the oil is recompressed and injected back into the field to maintain field pressure and for storage until future use. The platform is 315 km east of St Johns, Newfoundland and sits in 80 meters of water on top of two principal reservoirs. The Hibernia deposit is an average depth of 3,700 meters and the Ben Nevis-Avalon deposit is at 2,400 meters. This is the 5th largest field ever discovered in Canada. The reservoir spans 68 km and the longest well drilled from this platform is 30,000 feet where most of that depth is horizontal. This horizontal drilling through the deposit results in as much as 1,125 feet of net pay in the longest wells. The platform can drill two wells at one time and more than 80 wells are planed to complete the field. The base is constructed of high strength concrete, sits on the ocean floor and has storage capacity for 1.3 million bbls of oil. The base is a 105-meter, hollow concrete block weighing 600,000 tons. Once sunk an additional 450,000 tons of solid ballast was added. Hibernia oil is offloaded onto tankers in 675,000 bbl increments for shipment to the east coast of the US.

Hibernia Platform

Hibernia Concrete Base

I will never cease to be amazed that a project like Hibernia can exist. But the scope of that platform is not the real point here. If the technology in 1990 could locate a field 11,500 feet deep in 250 feet of water 315 km off shore in an area with 45% visibility or less 80% of the time due to fog then why won't people believe that the big oil has already been found? Think about it. This process has been duplicated all over the planet for the better part of four decades. Onshore, offshore, shallow water, deepwater, in mountains, prairies, deserts and ice fields. If there was a geologic formation open to exploration capable of producing and holding oil it has been tested or at least charted. Wells have been drilled in as much as 10,000 feet of water and 34,000 feet into the earth. There are no giant fields left. Each find continues to be smaller and smaller simply because the big ones are the easiest to find. This constant discussion about $50 oil or $40 or $60 is going to eventually be mute. It is only a matter of time. Keep the faith and we will be well rewarded!

US Weather Map Early Saturday Morning

Cold weather is coming despite what the weatherman is predicting for the east coast for the next month. This cold front should do wonders for increasing gas consumption and heating oil demand once it slides to the east.

The average change for all our positions last week was -29 cents. Considering the crushing blow to oil prices this was very manageable. If you eliminate the portion of the -$6.65 from SNP that was not attributable to us after we were stopped out that -29 cent number quickly turns positive. It was not a bad a week as it seemed in the press. Be sure to check the play notes for those positions you currently own.

Jim Brown


February Crude Chart - Weekly

February Gas Futures Chart - 90 min

 

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