Option Investor

Out With the Old, In With the New

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The December crude futures contract is now in the history books and the January 2008 contract is now the current month. The December contract hit a new historic high at $98.62 back on November 7th as the perfect storm of concerns pushed prices towards that elusive $100 mark. The January contract has support at $91 and again at $89.50. It will be interesting to see if the same factors that whipped the December contract into a frenzy will be able to support January.

The OPEC meeting this weekend will be the first news item likely to move prices. OPEC spokesmen have flatly denied that any production items will be discussed and that those concerns will be discussed only at the December meeting. That does not mean every oil minister in attendance won't be stepping up to a microphone for their 5 min of fame once the meeting is over. This could be the first test for the new contract.

Helping to push prices lower was a sharp drop in gasoline demand over the prior week. Demand fell to levels not seen since May due to higher prices. Also depressing prices was a jump in inventory levels of crude by +2 million barrels. There is nothing on the horizon to change those metrics. No storms, no geopolitical storms and the buzz over oil prices seems to have eased. That $100 target is still floating in the distance and I would not count it out yet. October and November are normally the weakest months for crude and we hit new highs instead. Does that mean the normal December strength will continue? We hope so.

It was a volatile week for the LEAPs portfolio. Monday's sharp decline in the stock market triggered several watch list positions. Tuesday's sharp drop in crude hammered those new entries as well as the rest of the portfolio. The rebound in crude for the rest of the week was neutral for stocks although quite a few were up strongly on Friday as the contract changed.

We now have a full portfolio and analysts upgraded oil stocks on Friday saying even a drop in oil prices would still leave crude at historic highs and be very beneficial to exploration efforts and profits. When you think about it a simple 10% correction would only take us back to $88.76 and that was the historic high on this contract until three-weeks ago. It is also decent support so bring it on! Give everyone else a buying opportunity and we will ride out any volatility. Unfortunately most of the current entries have so much volatility built in we can't afford to by insurance puts. We will just grin and bear it. You can always sell calls against your leap for added insurance.

The high price of oil has prompted the press to run a flurry of stories on peak oil. None of which have been accurate but at least they are moving in that direction. We are going to offer a DVD in the end of year renewal special on the coming Oil Apocalypse that was done very well. The Q3 earnings reports gave us a view into the production shortfalls of the major players. Year to date production from Conoco is down -80,000 bpd, Shell -69,000 bpd, BP down -100,000 bpd and Exxon -23,000 bpd. That may not sound like much but it is the perfect picture of depletion. Those numbers take on a much larger meaning when you start comparing years instead of quarters. Since 2004 Conoco's production is down -14%, BP -8% and Shell -18%. Record high oil prices and production continues to fall. Even an idiot could see how this story is going to end.

I am going to cut this commentary short this week because I have a lot of stocks to cover today. If you have not taken advantage of these new entries I would suggest picking your favorites and trying some dip buying over the coming weeks.

January Crude Futures Chart - Daily

December Natural Gas Futures Chart - Daily

December Gasoline Futures Chart - RBOB 90-min


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