This morning we are seeing world markets come under pressure as fears of a European collapse spread. Within the borders of the continent traders fear the contagion, whereas traders outside the continent fear that this crisis will be uncontainable. These types of markets are hardly good for commodities, commodities traders or commodity markets in general. Yields are rising in Europe and higher yields are never good for commodity prices, especially in this case as they indicate slower growth and economic issues ahead.
This morning we find that oil is down, but still holding the $90/barrel level as gold and silver are both lower. One should watch natural gas prices to see just how bad this shall be, because the trend there has insulated it from outside pressures as of late. If one must find themselves categorized as net buyers in this type of market, we reiterate our belief that you must purchase those stocks tied to companies which have production growth high enough to offset the fall in the underlying commodity price of whatever it is that they produce. That seems to be the only way to go in a situation such as this.
Oil & Natural Gas
Kodiak Oil & Gas (KOG) will report their quarterly results in early August and investors will get a better idea of how the infrastructure build-out and cost cutting are going. Look for increased production, lower drilling costs, lower transportation expenses and higher realized prices for production. Volume remains strong here, but the price action has turned and we have broken through support levels over the past two trading sessions. Shares closed down $0.39 (4.33%) to finish at $8.61/share on Friday with the news from Spain. We think that oil prices will come under a bit of pressure in the short-term now and that will put further pressure upon Kodiak shares.
As quickly as the story has turned unattractive with Kodiak shares, it has been far uglier for Chesapeake Energy (CHK) as investors have fled recently. Shares closed Friday at $17.20/share having traded lower by $1.08 (5.91%) on much higher volume than normal of 52.8 million shares. A debt crisis is not at all what Chesapeake needs at this moment as they carry a heft debt load themselves, but even more important is the fact they need calm markets in order to divest the various assets they have for sale across the country. Look for another day of downward movement here and the potential to test the $15/share level in the week ahead.
We would once again start watching Vale (VALE) for buying opportunities moving forward. It will break below the $19/share level today if it follows the market's lead lower, and with that move we should see the $18/share level come into play at which point the yield begins to help assist the market determine a floor. The company's shares traded lower by $0.49 (2.50%) to close at $19.08/share on volume of 17 million shares on Friday. The yield is already at 6%, so one cannot expect it to go much lower but patience is a virtue in these types of markets.
Looking at the potash companies this morning we have seen strength here over the past few weeks, and of note Friday too. Potash Corp of Saskatchewan (POT) rose $0.12 (0.26%) on Friday to close at $45.43 as many other commodity stocks fell. It was done on relatively strong volume of 5.5 million as well. Agrium (AGU) also saw its shares rise in trading Friday as shares closed at $95.45/share having risen $0.29 (0.30%) on volume of 1.06 million. Agrium is trading just off of its 52-week high and this is most certainly attributable to their diversification throughout the farming industry, whereas their competitors are mainly pure plays. The diversification has enabled the company to maintain margins, revenues and profits to a better degree than peers, and one should look to them for hints towards where this sector of the market is headed.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.