Option Investor
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No Analogy

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All the bears have gone silent. Heck, even the bulls have gone silent. I got a kick out of the TV reporters trying to explain the end of week rally in oil. Bob, what caused that rally in oil yesterday? Bill, we really don't know Bob, there are no fundamentals supporting it. Looks like the new storm in the Atlantic or Turkey crossing the border into Iraq. In other words, I don't know. It was like that all day Thursday and Friday.

The worst thing about it is I don't know either. Nobody does except possibly Merrill Lynch analyst Mary Ann Bartels. She explained after the close on Friday that hedge funds were long oil and commodities and shorting the S&P, Russell and NDX futures. After sounding so knowledgeable she ended her interview by saying Merrill expected oil to pull back next week. Famous last words. Nearly every analyst in the country has expected that for the last 8-weeks and they have been wrong.

I am pretty sure tropical depression 15 now in the Atlantic and 1,000 miles off the coast of Florida and heading east is not a threat to the gulf. By the time you read this it will not even be on the hurricane-tracking map.

Those reporters claiming Turkey was to blame for the new record close may have been half right. Turkey is being terrorized by Kurdish rebels hiding in Iraq. Turkey has warned that they could cross over the border into Iraq to bring the fight to them. If this happens there are worries that oil flows in the pipeline across Turkey from northern Iraq could be at risk.

On the national scene Energy Secretary Samuel Bodman said prices are being driven higher by fundamentals, supply and demand imbalance and not speculation. That is what he is supposed to say. The IEA said on Friday that oil supplies held by the worlds largest industrialized countries had fallen below the 5-year average. That sounds like a fundamental reason for higher prices but that level still provides for about 175 days of demand. That is a long way from a shortage.

I could post a dozen comments here from various analysts that think the slight drop in oil inventories this week was an anomaly and could be corrected next week. Imports for the week fell an average of -350,000 bpd or 2.5 million bbls for the week. Inventories were down -1.7 mb. Since there are a million reasons a tanker can be delayed in its 30-day trip across the ocean it could just be a timing issue rather than some OPEC conspiracy designed to move oil prices higher.

I think it no longer matters if the mythical October decline appears. The cycle has been thrown into disarray and even if it did appear there may not be a rebound into the winter months.

Because prices did not fall on schedule the stock prices for the companies we really wanted to buy have risen out of our range. Without a crash instead of a dip we may have to wait until spring to get our next batch of entries. I know that is not a pleasant thought but I really don't want to buy anything energy related at this level. Oil closed at a new high on Friday. Do you really want to be going long here?

Petrochina (PTR) was up +23 on Friday. This came after Warren Buffet said he significantly reduced his holdings in PTR to only 3.1%. That should be a sell signal, right? You would think but the impending IPO on the Shanghai exchange has Asian investors throwing money at the stock in hopes of the IPO rubbing off on the regular shares. We can scratch that one off of our list. We can take all the Chinese targets off our list since the Asian markets rallied after the weeklong holiday.

The first round of energy earnings begins next week with Noble (NE) and Slumberger (SLB). They should give us a preview of the sector performance.

I am leaving tomorrow to head for Houston where I will get to talk to Boone Pickens, Matthew Simmons and Henry Groppe along with dozens of other oil industry experts. I hope to have some new insights when I return the following week. Until then we will continue to nurture our existing portfolio and gaze wistfully at Petrochina's gains.


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