It often takes until mid-morning on a Monday to determine market direction for the week.
Stocks came out strongly earlier today, especially the oils and golds, but are now retreating rapidly. We’ve indicated you need to sell strength and buy weakness if you want to play commodities.
At 11:00 am:
The DJIA (NYSEARCA:DIA) was down 26 at 12,143 after being up 74 at 12,243 earlier.
The Canadian S&P/TSX index was down 51 at 12,201 but was up 79 at 14,331.
April WTI crude (NYSEARCA:OIL) was at $105.49 up $1.08 after being as high as $106.95.
April Gold (NYSEARCA:GLD) at 1,434.50 up $5.90 after being as high as $1,445.70.
Yet another rumor planted by the oil “shorts” (trying to knock oil prices down and profit) that Libyan dictator Gaddafi is preparing to flee that country (a week or so ago the rumor was he had been shot and the oil market took a dive).
Yes, but what about his seven sons and daughter? Would he leave them to fight the rebels alone while he relaxed in Venezuela? I think now.
Why would he flee when his forces have gained back Bin Jawad West of Ras Lanuf and leveled Az Zawiyah by most accounts. Here's a map of these battle zones, courtesy of the BBC http://www.bbc.co.uk/news/world-africa-12670580
Also unlikely under current conditions, is that the US would release any of their 700 million plus barrels of Strategic Petroleum Reserves. The SPR is reserved for a true and major disruption in global supply, not just because the oil price is being pushed up on speculation the "Arab Spring" uprisings would spread to Saudi Arabia.
According to the International Energy Agency’s latest (March 4) report on Libya…
“Reports from some European refiners indicate there is ample crude until at least the end of March and that they are now scheduling for April supplies. Currently, crude oil markets in Europe are not perceived as constrained, with crude demand relatively low due to a period of large-scale maintenance of refineries in Europe.”
The truth is the Libyan revolutionaries picked a lousy time to awake and drive out their dictator. Both European and US refineries experience more downtime in Spring for maintenance and conversion to gasoline production from distillates. Therefore there is less need for crude oil compared to the Summer.
I am recommending taking profits on oil equities because we have had a big two week move on WTI ($90 to $105) and nothing has changed in the glut of oil in mid North America. NYMEX WTI futures have gained a large speculative long position.
The next move on oil will probably be down and it will be savage when it occurs.
Therefore, we recommend taking profits on Nexen (NXY) @$26.70-$27, Talisman (NYSE:TLM) @$24.35-45 and Cenovus (NYSE:CVE) $38.60-80. All prices Canadian.
We’ll buy these stocks back after there is marked weakness to reflect the increase in Saudi oil supply and any outbreak in peace in Libya, which hopefully will occur with the rebels taking over Tripoli. Price spikes could still occur if Gaddafi bombs his own oil facilities in a scorched earth retreat – but this still doesn’t imply business is any better in North America and with gasoline prices elevating, volumes will start declining.
Much better to buy our favorite oil stocks towards the end of March and before they release Q1 earnings which should be buoyant, especially for Brent oil producers like Nexen and Talisman.
One note on Talisman – they hedged 60,000 bbls of their North Sea production (roughly half) with a cap at Brent prices below $92 and $97. Since Brent is above $115/bbl, these derivative positions are running big losses. This is why the stock seems to fade just when you would expect further strength. So we like to trade the stock.
Yemen is faced with a standoff between President Ali Abdullah Saleh, who won't leave, and the protesters, demanding his immediate resignation. Tensions are heightening, and an armed insurrection is probable.
Nexen has operations in Yemen, so the stock trades off news of the chances for Yemen to sink into a civil war.
The smart money is betting the US won't allow Yemen to descend into war (unlike Libya) because of the Al Qaeda threat there and US security interests.
Odds are the Libyan rebels will require help from the West to defeat the Gaddafi forces, which is not forthcoming as of yet. It’s a crime the US Defence Secretary Gates thinks a no-fly zone is too complicated to arrange, however it is also true they may be working on it behind the scenes with their NATO allies. A no-fly zone could be announced shortly, another reason to trade, not marry into the high crude oil market.
We are adding to our BCE (NYSE:BCE) (@$35.10) and TELUS (NYSE:TU) (@$47) positions with the cash from the oil sales.
Trading Note – Canfor Pulp Products (CFX on the TMX)
On other news, the fact Asian paper and pulp producer Paper Excellence has announced taking over the Prince Albert, Saskatchewan idled NBSK mill and will restart it with $200 million in renovations, has knocked down the stock of Canfor Pulp Products by 47 cents to $16.95. We think the fear of oversupply in the NBSK market is a bit overdone and recommend purchase of CFX at these levels, as the company is instituting green power plans and will not be affected by higher crude oil prices going forward.
We’ve been a seller of CFX at $17.50-60 and a buyer below $17.00. We also like the Dissolving Pulp stocks Rayonier (NYSE:RYN) @$60.50 and Buckeye Technologies (NYSE:BKI) @$25.10.
Writers note: Unfortunately this article written at 11am on Monday was held up by a request for revision and therefore the timeliness of the information was lost.
Disclosure: I am long NXY, TLM, RYN, BKI.
Additional disclosure: This information was disseminated to clients and subscribers of The BCMI Report anywhere from 12 to 48 hours before appearing on Seeking Alpha.