Option Investor
Commentary

Any Day Now

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The current dip in oil prices has already fallen further than I expected. $58 was my target and Friday's close was right at $57. Any day now I expect buyers to return and push us back over $58 for the next several months. I still believe this is our last buying opportunity before the summer highs.

OPEC met with lots of fanfare but failed to do anything but congratulate each other for pushing the price of oil higher. The compliance with the prior two cuts was said to be in the 70% range, which among OPEC members is almost the best they can expect. With prices just under $60 when the meeting began there was no need for further price manipulation. I am sure the drop under $57 before the week was out had some oil ministers wishing they could have a meeting do over.

The biggest surprise of all was the announcement that they would meet again in September. They were expected to meet again in June as the summer driving season gets underway but that meeting has been canceled. This was actually bullish for prices since it suggests they are not in any hurry to raise production. In fact OPEC has setup a nearly perfect scenario. With prices near $60 and the US driving demand and hurricane season just ahead they could have set the stage for sharply higher prices by not scheduling a June meeting.

OPEC had agreed to cut 1.7 mbpd off the market over the last few months. Only about 1 mbpd was actually cut. OPEC said they would focus on raising compliance rather than changing production quotas. If they can enforce compliance we could see some sharply higher prices. The IEA said last week that OPEC was already producing 400,000 bpd less than it should to maintain supplies at an adequate level. OPEC issued a report on Thursday saying it needed to produce 180,000 bpd more than its prior forecast between April-June.

Conoco Phillips said this week that they were going to spend $1 billion each on 30 different projects aimed at raising their daily production by 3% by 2011. That is a lot of money to only add 79,800 bpd in production. Conoco said costs had risen by one third and would continue to rise due to harsh production environments, lack of employees and smaller projects.

Haliburton said it was going to move its corporate headquarters to Dubai but that was not the big announcement for the week. HAL also said it was going to hire 13,000 workers in 2007 to handle planned growth from 2007 to 2009. HAL also added 13,000 workers in 2006. I dare you to try and convince anyone there is not a drastic exploration effort underway. These are not cheap workers!

This is going to be a short update this weekend. I am battling the flu and my publishing deadline is fast approaching.

Jim Brown


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