Option Investor
Commentary

Ground Hog Day

HAVING TROUBLE PRINTING?
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Do you remember the movie Ground Hog Day with Bill Murray where he is forced to relive the day over and over again with the same ending? I feel like Bill Murray reliving an energy nightmare over and over again every day for months. The correction began on July 15th and despite a flurry of negative news events there has been very little in the way of rebounds.

Other than natural gas the crude chart is one of the ugliest charts I have ever seen. It makes it even more personal because of the money I have lost trying to catch the falling knife. It is a pure testimony to the fact that trend changes do not have to have a reason and they can be self fulfilling.

I thought we were past the ugly when prices failed to decline two weeks ago and then rallied a week ago. Just the reality was beginning to return to the oil market the sudden fund liquidations took their toll. Tuesday's -$9.61 drop in crude is simply without precedent. It was the biggest single day dollar drop ever and according to analysts today it was position dumping by Ospraie and the magnitude of the drop triggered stops on tens of thousands of contracts. The excessive leverage of the billion dollar funds magnifies the problem. As a $4 billion fund they probably had leveraged into $20 billion in positions in oil, gas, minerals and equities. Try getting out of those in a hurry and you have the market we had last week.

It is bad enough when a stock in the portfolio takes a dump after missing earnings or getting hit with the dreaded valuation downgrade. To get crushed for no reason for the stock or sector is extremely frustrating. It just proves again that bear markets happen and they tend to feed on themselves. Reasons don't matter when stops are getting hit.

We were blown out of all but one position last week and that was Anadarko. They announced a $5 billion buyback and that kept them off the endangered species list. We were triggered on five new positions by the monster drops.

I want to believe that the selling in oil is about over with strong support at $98 that OPEC is sure to defend. The OPEC meeting is Tuesday and they are not expected to announce any changes in production other than privately force members back under their quota limits. OPEC is currently producing 574,000 bpd over their quotas and most of that is coming from Saudi Arabia. If they force them to obey the quotas we can expect that production to disappear.

With the drop in gasoline usage over the last 17 consecutive weeks we have seen our oil requirements decline by about 1 mbpd. It is only temporary and once prices fell back below $4 the buying surge for SUVs began. Manufacturers said August saw strong sales in beaten down models. SUV searches on the Internet increased by 19 times in August. That proves Americans are not yet ready to kick the SUV habit and gas consumption will be back very soon.

Gustav may have avoided giving the gulf an energy headache but 90.5% of oil production is still offline as of Friday night. Gas production is still 79.8% offline. The oil patch and New Orleans has a new problem this week and his name is Ike. The new hurricane was a category 4 on Friday and forecasters are now plotting tracks that have Ike hitting the east side of New Orleans. Actually the track at 6:30 Saturday morning was dead center on New Orleans.

I doubt the oil patch is going to dodge the bullet twice in two weeks and managers seeing this major storm heading for the patch may think twice about restarting full production only to shut it down again two days later. The current track has it hitting the oil patch around 2:AM on Wednesday.

This should also be a week where oil inventories begin to drop sharply. The following week should be the worst but we should see sings of hurricane stress in this Wednesday's report.

I am going to refrain from loading up the watch list again given the bear market and we will let the existing plays run their course. Once a positive trend emerges we will get back on the horse and try again. I did add a couple plays to capitalize on the Fannie/Freddie takeover. I used the homebuilder SPDR and Goldman Sachs as potential candidates for a renewed banking sector.


Jim Brown

If you have registered for the ASPO Peak Oil conference and have not received a personal email from me with conference notes please send me an email. There is still time to register and join the crowd. Go here to register: http://www.aspo-usa.org/aspousa4/

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