Posted by zmann on October 23, 2006
Opec Watch: They came, they saw, they cut. And oil traders didn’t buy it. As I have written repeatedly in the last 2 weeks since the rumor of meeting surface it was “buy the rumor, sell the news.” Opec’s credibility has been shot by acting like a hydra while attempting to convey the mixed message of the need for oil to be priced at levels more than double those three years ago while the cartel is increasing surplus production capacity (link).
Putting My Money Where Typing Is: Targets For November. My Bias remains Negative for oil and gas prices and the XOI, XNG, and OIH. Targets are pretty stupid in a vacuum. New data comes in and I re-evaluate my bias. At present I remain negative on the commodities (and therefore select companies that either sell them or sell services to those guys). The negative bias on the commodities is almost entirely based on supply demand fundamental but, and to a much lessor extent, technical-analysis plays a part as well. So why not lay out my current thinking for November?
—Crude Oil: Lower. The December contract is holding to a tight range between $59 and $63. If the Iran things blows over like it has the last several times then oil should tumble Tanker loadings remain high.
—Natural Gas: Much Lower. More on this below but I expect natural gas to fall to $5.25-$5.75 by this time next month from a current ridiculously high $8.10 on the December contract. Watching for the turn in gas and then into puts on APC, BBG, EOG, KWK, and LNG.
—XOI – hinges on the DJIA and not oil. The linkage is dumbfounding until you realize that the go, go market rules XOM (at least until earnings) and that until fund managers see a precipitous drop in the big dog, there won’t be a capitulatory sell off in energy complex.
Current Picks: Puts on XOM (Nov $67.50), HAL (Nov $27.50), FRO ($35), and PTEN (Nov $20) and SU ($65). I paired my gassy stock puts back and am watching closely for a turn in natural gas before re entering puts on APC, BBG, EOG, KWK, LNG, and SWN.
—Priced To Perfection Club: XOM, OMM, SLB (see comments Friday),: these are stocks that have not seen their stock prices suffer and need strong beats on earings.
On Hold: Refiners – crack spread recovery could continue well into winter months, earnings for most are due out next week so I’ll put together a white paper by the weekend.
CFTC Shows Short Covering– new update-link- shows short covering over the last three weeks has been behind recent strength in natural gas prices culminating in a buying frenzy. Natural gas prices advanced an unreal 27% in the last week. This exceeds the percentage record increase for September to December.
Tet In Baghdad. From this weekend’s headlines. We’ve Lost the Battle for Bagdad and Bush: I Won’t Change Strategies In Iraq. If things get further out of control, the situation in Iraq could become more supportive of oil prices than anything else going on right now as the fragile but growing (estimated at 2 mm bopd currently) Iraqi oil supply is threatened.
Holding Watch: HAL beats top and bottom line. At first blush the quarter looks a little strong but I wasn’t looking for a miss so much as an indication that things on both the energy services side and at KBR has seen their best days for now.
Analyst Watch. BBG, SWN, and While I have no opinion on NFX at this time, they did lower production guidance (delays, not misteps) last week so while it bears watching I’ll probably stay away from those guys on the put side. Jefferies cut its target on NE by 10% and Goldman picked up the weird-energy group (solar, clean coal, etc) with a Neutral rating, which probably will remain that way until spring when all of the sudden, fear of summer heat and high electricity bills will prompt an update.
Non-Opecies Have Don’t Plan To Cooperate. My thanks to Soccer for his summary of non-opec plans which pounds home the point that Opec is less important than they think they are.