Option Investor

September To Remember

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What a month it has been. There has been no rhyme of reason to many of the market moves being long or short almost anything was a recipe of disaster. I don't believe that volatility is over but so far the month of September has definitely lived up to its reputation. Crude has traded in a $20 range in just a five-day period and now appears to be waiting for another chance for a retest of $90.

The hurricane cleanup and facility restart is well underway and Hurricane Kyle is moving up the east coast and safely away from the gulf. There are no other material storms on the horizon and the gulf should be back to full strength in a couple weeks.

Power is being restored quickly and the gasoline shortage in the southeast should fade soon. Crude levels have fallen by 15.5 million barrels over the last four weeks but gasoline levels have fallen even farther losing 16.7 million barrels. Without operating refineries to process crude the draw to crude has been minimal with the lack of inputs from the gulf the major negative. The gasoline shortages have been much more severe but should be easing soon. Over 45 million barrels of refinery production has been lost. Lines at service stations in Atlanta stretched from 10 to 25 cars in length at those stations lucky enough to have gasoline. Welcome to a preview of what peak oil will look like only it won't be temporary.

The MMS reported on Friday that 700,000 bpd of gulf production was still off line. Three refineries with combined capacity of 700,000 bpd were still offline and ten refineries were in restart mode at reduced rates and beginning to ramp up capacity.

Ecuador, OPEC's smallest member, said OPEC will not let crude prices fall below $100 and will act quickly to cut production if prices dip again. These comments were from Ecuador's president Rafael Correa.

The recent drop in natural gas prices has reached a critical stage. The price of gas has fallen to a level equal to the cost of production in many areas. Chesapeake (CHK) announced last week they would be curtailing production, cutting their active rig count and reducing their capital expenditures until prices recovered. CHK is the largest U.S. natural gas producer and driller. In recent years curtailment announcements from CHK have marked a bottom in gas prices. CHK is expected to be joined by Petrohawk (HK) and Sandridge (SD) in production curtailments. CHK said it would cut daily production by 100 million cubic feet of gas. CHK said wellhead prices of $3-$5 per thousand cubic feet was substantially below breakeven costs.

I spent three days at the ASPO Conference early last week and met with 25 Option Investor subscribers to discuss what we heard. The news was not good. I think everyone went away with a greater sense of urgency regarding the current problem. I am going to prepare a report on what we heard but that will not be complete for a couple weeks. I am on a two-week road trip to visit relatives in three states and I will produce the report when I return to Denver.

I did not add any new positions again this week. I am not comfortable with the market. The "bailout" version 6 or 7 depending on how you count is still not complete and hostility is rising from the public, analysts and lawmakers. Something needs to happen but nobody can agree on what. Until we get this behind us I do not feel comfortable entering new long plays.

I believe we could see another dip in crude prices since the market is still "well supplied" to steal an OPEC term. Tankers began offloading crude last week at the LOOP in the gulf and next week's inventory report should be much higher. That could depress prices again. After getting blown out of positions on the last three dips in crude I want to be careful about jumping in too soon again.

Jim Brown

November Crude Futures Chart - Daily

October Natural Gas Futures Chart - Daily

October Gasoline Futures Chart - RBOB Daily


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