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Commodities Test Critical Support: Oil -- $60, Natural Gas -- $7.

  • Oil -- falling. $60 floor failure. As the refining industry snafus sort themselves out and OPEC prepares to meet in Vienna, oil is starting to retreat. I'm looking for a pullback to $57.50 and then into the mid $50s. Timing is critical. If crude falls through $55 early this week, look for sharper rhetoric and even "promises" of production cuts later in the week from the more brash members. This could lead to some very volatile trading late in the week. It's funny how it's not all about the money -- until it's all about the money.
  • Natural Gas -- falling. $7 floor failure. After trading off $0.30 in the last three days of last week, gas repeatedly touched $7.00 in the overnight market, finally breaking through into the high $6s early this morning. This is its lowest level since late January, and it looks to me like we're in for a bout of shoulder season weakness, potentially making a run on $6.50 in the coming week or two.

Last week's heating degree days were expected to be roughly in line with the prior week (177), which produced a 90 Bcf withdrawal (102 officially, but that included a database adjustment.) As of 8 am EST, last week's HDDs were still not posted, so I'll have them in comments later today.

This week's early read from the CPC predicts HDDs fall off a cliff to 106, numerically reflecting the following map.

Red Dawn 12 03 2007

Why all the commodity price weakness? Two words: Red Dawn.

The Week Ahead: Last week the stocks failed to track the commodities lower. I'll be taking a hard look at new or additional put positions in stocks that are:

  • elevated on the gasoline run: Holly Corp. (HOC), Tesoro Corp. (NYSE:TSO), Western Refining Inc. (NYSE:WNR) and Valero Energy Corp. (NYSE:VLO). The first quarter is going to be great, but a lot of that upside is already factored in with the large moves these stocks have all had.
  • gassy and still conducting asset sales: Anadarko Petroleum Corp. (NYSE:APC)
  • gassy and bought more gas at too high of a price: ConocoPhillips (NYSE:COP)
  • gassy, buying assets today, and not as well hedged as it's peers: Callon Petroleum Company (NYSE:CPE)
  • gassy, well hedged but looking toppy: Cabot Oil & Gas Corp. (NYSE:COG), Chesapeake Energy Corp. (NYSE:CHK), Quicksilver Resources Inc. (NYSE:KWK), and Southwestern Energy Company (NYSE:SWN). Warning: just a trade... great management, low cost producers, but susceptible to a slide in gas prices.
  • higher cost producers like Stone Energy Corp. (NYSE:SGY) and Energy Partners Ltd. (NYSE:EPL) which continue to break down after failing to get hitched last year. "Declining commodity prices" and "exploring strategic alternatives" are two phrases that don't mix well.
  • Hess Corp. (NYSE:HES), Murphy Oil Corp. (NYSE:MUR), and Marathon Oil Corp. (NYSE:MRO).

Odds & Ends

Halliburton Co. (NYSE:HAL) moves its headquarters to Dubai. Halliburton is also considering listing its shares on one of the Middle Eastern exchanges. Getting closer to state owned oil companies or further away from the Democrats in the nick of time?

OPEC Watch: OPEC meets Thursday. Everyone pretty much expects them to stand pat, which means nothing if oil punches below $55 by meeting time. OPEC is voicing confidence in oil prices with statements like the one from Algeria's oil minister this weekend: "Oil prices will remain at their current level until the end of 2007 because of strong demand and Iran's standoff with the West over its nuclear program." --Upstream.

Refinery Watch: Two more fires over the weekend. One in Volgograd, Russia and the other at the Puerto La Cruz facility in Venezuela. No word on damage although, the Russian thing looked pretty epic for a time. Probably limited impact on prices unless you're in Cuba.

Source: Energy Stock Trader: Monday Outlook