[BigTex]

RE, offshore companies, the reason DRQ is appealing to me is its P/E is 20 and forward P/E is 15, which looks cheap based on its earnings growth. Take a look at its fundamentals, strong ROA and ROE (16% and 22%). About 450 million in annual revenue and 1700 employees. They've been around for over 25 years, so it's not in the same space as startups, in my view.

It's a long term play, though. Lots of short term volatility. Unlike others in the sector, it's not currently bumping its 52 week high.

Just infotainment. Buyer beware, etc. I don't mean to sound like a pumper, I just like the stock myself.

Devon (DVN) is looking strong today. Up almost 4%. That's another of my short list of favorites.

[Mechler]

GSF and RIG look pretty good to me. But I guess they're quite a bit larger than DRQ.

MrBill, what sort of price are looking for to buy these guys? They don't look terribly expensive to me, especially considering their fundamentals.

Yeah, I think Devon announced that they're forming a Master Limited Partnership (MLP) today, which is apparently something investors like. Can someone explain more about these MLPs? I heard a summary of some big energy investment conference that was held in Texas a little while ago. Supposedly these MLPs are becoming much more popular. I don't remember where I heard that summary. It might have been 321energy.com.

[MrBill]

I am not a stock analyst. So I cannot comment on each stock's underlying fundamentals. But from a top down approach the S&P500 Energy Index (GSPE) is looking about as over-bought as EUR/JPY and is long overdue for a sell-off. That does not mean the 'irrational' part of the rally cannot continue all summer until every bearish contrarian is penniless before it eventually drops. These things can and do happen. And in my case, far too often! ; - )

WTI (CL1) has been in a continuous uptrend since the week of May 13th, or 11 weeks in a row, without even a serious test of support. For me, 13 weeks is a fibonacci number, so my guess is this rally has another 2-weeks to run. It is already over-bought on the trading envelopes (TE) charts, which are the 2-standard deviations from the 21-day moving average, and CL1 is at 74.44 on the RSI. Trading envolpe resistance (TER) is at $76.

Support (TES) is at $67.33. The bottom on the channel for CL1 is at $67.40, which is also the 0.382% fibonacci retracement. So triple witching support level. My play on that given timing will be as important as not getting stopped out on a short position in the futures would be to buy an OTM put option at $69, which is TES with one standard deviation from the mean. There is a 68% chance we will hit that level from today's price. Not bad odds.

The levels for Brent are TER = $79.08 TES = $68.73 RSI = 64.13 (already seen slight correction off highs at $77.57 on July 13th)

Flies in the ointment are a weak US dollar ($1.3800) and those bullish fundamentals stemming from the unexpected drawdown in gasoline stocks this week.

$this->bbcode_second_pass_quote('', 'O')IL & GAS PRODUCERS: Market moves up on gasoline

DOE stats bullish overall given surprising gasoline draw - The DOE reported a 0.5MMBbls draw from crude oil stocks, a 2.2MMBbls draw from gasoline stocks, and a 0.2MMBbls draw from distillate stocks. The unexpected draw from gasoline inventories provided a boost to energy markets (both equities and commodities) post the 10:30am release.

Gasoline draw due in large part to 36% lower imports - Gasoline stocks decreased 2.2MMBbls last week due in large part to lower imports, but also higher implied demand and lower gasoline production. Draws were seen in PADDs 2, 3, and 5 (Midwest, Gulf Coast, and West Coast), but were partly offset by a build in PADD 1 (East Coast). Implied demand for gasoline averaged 9.7MMBbls/d last week, a level not seen since June 2005, and was up 0.5% versus the prior week and 0.3% versus the prior year.

The drop in imports to 0.9MMBbls/d vs. the prior week's 1.4MMBbls/d was mostly due to a drop in blending components; finished imports stayed flat. Production of gasoline fell for the second week in a row to 9.1MMBbls/d despite rising refinery utilization rates, but was still up 4.1% versus last year according the the 4-week MA.

Crude oil draw in line with expectations - The crude oil draw of 0.5MMBbls was in line with expectations as the market correctly anticipated that imports would recover from the prior week's levels but would be offset by higher refining utilization rates. Imports were up almost 3.5% over the prior week and utilization rates increased almost 0.9% to 91%.

Inventories at Cushing, OK decreased 0.2MMBbls to 22.6MMBbls, and were down 5.4MMBbls from their peak levels in April. However, despite lower inventory levels, the spread between WTI and Brent stayed wide last week at almost $5/Bbl.

Slight distillate draw due to lower production and higher implied demandDistillate stocks decreased 0.2MMBbls last week, in contrast to consensus expectations for a small build, as distillate production like gasoline fell 0.7% despite higher refining utilization rates, and implied demand increased 1.8% versus the prior week. Heating oil stocks, which remain at 5-year lows, decreased 0.7MMBbls, while diesel stocks, which remain at 5-year highs, increased 0.6MMBbls.

[BigTex]

Mr. Bill,

Great insights, as usual.

A couple of comments:

What would push the market higher, even though it already looks overbought? Weather, terrorism, reports like the IEA report, more global warming evidence, more political instability in oil producing countries, etc. The world actually looks pretty quiet to me right now.

What do I know that armies of analysts don't know and what advantage do I have over them?

First, I don't have anyone to answer to but myself for my investment decisions, so I can be more nimble than a money manager. I can afford to be patient and I can afford to pay attention to long term trends without worrying about being forced out of a sector in a downturn in order to protect my track record.

Second, I have less market "noise" to filter because I am not as close to it as a professional analyst--i.e., in theory I should be able to see the forest where the professional analyst may get bogged down with the trees (perhaps without even realizing it).

Third, I am at a lower risk of "group think" errors. My experience with group think suggests that the more analysts you have working on an issue, the less innovative thinking you are going to see from the analysts.

Fourth, markets are driven by psychology, and psychologists will tell you that human beings have a difficult time synthesizing concepts that are at odds with their worldviews. The market's worldview is that endless economic growth is a given, and that is the filter through which they view all data. The PO concept will sink in, but it hasn't yet. If I have fully integrated PO into my worldview, and the market has not, then I know something the army of analysts don't (assuming my understanding of PO is correct). I was really surprised that the IEA report seemed to rattle so many people. When I read it, I thought to myself "nothing new here; this is about what I would expect".

In general, most on this forum are aware that at some point there will be dramatic friction between oil supply and demand, and we all know that the friction will be resolved in favor of supply. When this friction begins to really hit, I think we will be at the beginning of a VERY long bull market for conventional energy. If we are there right now, we are in the early stages. If we aren't there right now, I sure wish I knew why the price of oil has tripled in four years after trading in a predictable range for the preceding 20+ years. We had middle east wars during that period, we had weather during that period, we had terrorism during that period, we had enormous political change during that period, and yet oil stayed in its trading range.

Remember that if SA has peaked, no one in the mainstream knows yet. What will that do to the market when it gets out?

I see perhaps 10-20% of the PO story baked into the market right now. That's just my take. Of course, I don't know how you trade on that other than long term. I do think, however, that understanding what the long term (20-30 years) picture is going to look like provides the trader with a better feel for what a real top is and how deep bottoms are likely to be.

[Mechler]

MrBill, great analysis. BigTex, great answer. In regards to your psychology comment - that's what makes me afraid, in the short to mid-term, about how oil stocks will fair during a large market sell-off. "And we will all go down together..."

But, Big Tex, you've heard me say that before, and you've down some good analysis of your own as to why energy should be better off relative to anything else.

And if you've been a bear on energy stocks the last few months, well, sorry you missed some great returns.

MrBill, I have a question for you about SLB. I've owned it since before the last split (around $60), and it's had a great run. I took some off the table at around $80 or so, but I'd like to increase my position when the time is right. Any thoughts or insights? Earnings will be released tomorrow, and I think the recent run is in anticipation of some good numbers.

I wish I had your patience to wait for a major correction.

Thanks!

[Mechler]

One more question for whoever wants to field it...

What are your thoughts on natural gas? It seems like a lot of potential upside with hot weather, possible hurricanes, and the fact that demand will certainly ramp-up this fall and winter.

I don't trade futures, but there are ETFs (or at least one) that cover that commodity.

Now that I look at it, there is significant contango, which is bad for long positions in a fund that trades front-month contracts, right? However, I'm thinking that it wouldn't be a bad speculative play through hurricane season. Oct 07 prices are only at 6.95, which will seem pretty cheap if a hurricane goes through the gulf between now and then.

Thoughts?

[BigTex]

In a big selloff the energy sector is likely to get hammered along with everything else.

If I knew where the top was, I would sell there. As Mr. Bill notes, however, picking a top right now is tricky. I suspect that the NPC report from yesterday will provide more juice for oil markets, or at least it should.

When people begin analyzing stocks following a big selloff, even if the economy is no longer growing, I still think that the relative inelasticity of demand for energy will become apparent. And even if there were a little contraction in demand based on a sour economy, the demand reduction, in theory, would have to outpace the forecast supply shortfalls to make oil less profitable on a per barrel basis (I know I am simplifying here, but I think that is generally true).

All in all, I would rather be in energy than any other sector if I had to pick one to go into a crash with. A 52 week high means nothing if the valuation still looks good. I'll take Chevron with an 11 P/E all day over Apple with a P/E of 44, in part because there is a LOT of elasticity of demand for iPhones and iPods (if people have to choose between gassing up their car or downloading some iTunes, what are they going to choose?).

I think the psychology of the energy market right now is buy the dips, buy the dips, buy the dips. I think all those dip buyers would blunt energy losses in a selloff.

Ask yourself this, what kind of news would cause a huge energy selloff right now that wasn't hitting the rest of the market? I can't think of any, short of something wild like another Ghawar being discovered in Utah. Every downward move seems to be followed by dip buyers pushing it back up. On the other hand, I can think of countless things that would push prices higher.

What if SA announced it was going to "open the spigot" and flood the market with oil. Would this hurt prices? It might, but the market might take a wait and see approach, and if SA didn't dramatically increase its production it might drive prices even higher.

As Mr. Bill notes, a weak and getting weaker dollar is a wild card, but that supports my thesis that energy at current valuations may actually be a less risky place for your money than keeping it in dollars. My view is that dollars are just another commodity, and right now it's a risky commodity to be holding.

My intuition is that things like the IEA Report, the NPC Report, persistently high oil prices, persistent political instability in major oil producing countries, and the market signals that expensive deep sea drilling sends are all causing a gradual Wizard of Oz style pulling back of the curtain on where we really are with world energy. I think this is happening right now (as in today). The tipping point is being reached.....Of course, I may be wrong.

I think the size of the next correction in oil prices will tell us a lot about where we are. I'm actually anxious to see what the next correction will look like and what the low will be in the next 12 months. It's fascinating to watch this thing unfold. It's like being there when one of those skyscraper-sized glaciers breaks off and falls in the ocean. It's also interesting to me because in the back of my mind I'm always aware that I may be thinking irrationally, and if I am, I can't wait to see what my analysis was overlooking. Part of the reason I have been posting here lately is I was hoping someone would poke holes in my reasoning and plant a little doubt in my mind by making the bear case for energy (other than the standard demand collapse in a global recession scenario, which doesn't bother me. I believe any demand reduction in a worldwide recession would be modest).

[bobcousins]

$this->bbcode_second_pass_quote('BigTex', 'I') think the size of the next correction in oil prices will tell us a lot about where we are.

[MrBill]

Thanks guys! I am a lot more motivated to spend time researching this stuff and writing about it when I get some good feedback. And the more I do the better for my 'real' job as well.

First of all, I am a contrarian by nature. This can be a really expensive habit. And a hard one to break. Maybe this is because I traded ag commodities and FX first where there usually were a lot of back and forth movements versus stocks where due to transaction costs it seems that the trend is your friend?

One thing I had to get used to in trading crude futures was the volatility. I have said it often enough, maximum pain for minimum gain. It is a hard sphere to trade. Lots of insiders that know a lot more than I do, and the NYMEX open outcry session can be murderous. I have been stopped out so many times that I often wondered if it was worth it. Part of the reason that I have turned more to trading energy stocks to reflect my views versus the futures.

Having said that, I did buy some OTM crude puts yesterday in the WTI. They were very cheap. And WTI has an RSI of 75.38 today. Very over-bought in my opinion. I might hedge that outright view by buying either NG or RBOB OTM calls? Although not over-sold NG has a RSI of 45.31 and RBOB a RSI of 45.44. I am not sure you can think of 'spreads' on RSIs, but 30 full points seems like a lot when 30 is considered over-sold and 70 over-bought?

I talked to my buddy the former maths Olympian and nuclear physicist yesterday about probabilities and standard deviations. I wanted to make sure my thoughts on trading envelopes were somewhat accurate. Of course, he pointed out that standard deviations from the mean are historical measures and do not predict future price movements. That much I knew. So it is a little inaccurate to say that there is a 68% of going from the trade envelope resistance (TER) to the support (TES), but with 90-days of time value extending into October, and a RSI of 75.38 I think it is a calculated bet. I sell my options ATM and do not wait for them to expire ITM.

Just for your guide, 80% of my options bets paid off last year. But my last bet wiped me out because we literally shifted higher into a new range and that time I was long the OTM puts. I was so demoralized that, no, I did not buy OTM puts when the market peaked last year and then dropped like a rock by 36%.

But you have to keep hitting singles, if you ever want to catch a double or triple. No use swinging for the fence everytime if that is not your game. I also have to be realistic about my own trading style. I am still alive after all these years, but I know a lot of traders that are better than I am. I think my ideas are better than my execution. However, it is hard to backtest them! ; - )

[MrBill]

RE SLB $93.45
TER $92.20 TES $83.76
YTD 47.96% YOY 52.89%
P/E 27.65 est P/E 23.36

Piers
HAL P/E 15.76
Baker P/E 19.25
BJ Services P/E 10.32
Helix P/E 15.68
Global Industries P/E 14.16

123 crack spread
1st month $15.00
5th month $11.38
12th month $16.35

SLB looks cyclically over-priced at $93.45 relative to its piers and it has outperformed both crude and the S&P500 Energy Index. It may be time to take some profit on this one if there are any surprises out of the earnings numbers and/or if investors decide to take some profit. The Energy component of the S&P500 has outperformed the S&P500 and all other components YTD, so it may in any case be prudent to reduce your exposure and rebalance your portfolio.

If you still like the sector, then maybe it is time to move into HAL or Baker Hughes as they look a little cheaper? I still own 50% of my SLB position having taken profit on part of it last month ahead of the end of Q2'07. Some feel that refiners and shipping are cyclically over-done at these levels. Oil service companies are my prefered play on NOCs due to their expertise, but everything at the right price.

$this->bbcode_second_pass_quote('', 'T')he three largest U.S. oil companies will once-again post huge profits well into the billions as they weigh in with their second-quarter results next week, but higher refining costs and other factors will lead to lower earnings than the year-ago period for ExxonMobil and ConocoPhillips, based on Wall Street expectations.

[MrBill]

RE SLB
$this->bbcode_second_pass_quote('', 'O')il field services giant Schlumberger Ltd. posted a hefty 47% jump in second-quarter profit Friday that highlighted the value of a broad, international base of operations during a relative lull in North American drilling activity.

[MrBill]

$this->bbcode_second_pass_quote('Mechler', 'G')SF and RIG look pretty good to me. But I guess they're quite a bit larger than DRQ.

MrBill, what sort of price are looking for to buy these guys? They don't look terribly expensive to me, especially considering their fundamentals.

[MrBill]

Why you do not play each year the same as the last (or the year before)....
$this->bbcode_second_pass_quote('', 'M')ost people hedged for the hurricanes that haven't arrived yet

[sparky]

.

You guys are delusional .... oil price hasn't increased ...

it's the U.S. Dollard witch is falling through the floor

The Opec members are actually loosing money by being paid in greenbacks , they might switch to a basket anyday now

For a reality check look at the poll at the head of the thread 75 $ by xmass ,
next , you are going to tell me nobody fidlled with the WTI index since two weeks

.

[cube]

$this->bbcode_second_pass_quote('sparky', '.')

You guys are delusional .... oil price hasn't increased ...

it's the U.S. Dollard witch is falling through the floor...

[BigTex]

$this->bbcode_second_pass_quote('sparky', '.')

You guys are delusional .... oil price hasn't increased ...

it's the U.S. Dollard witch is falling through the floor

The Opec members are actually loosing money by being paid in greenbacks , they might switch to a basket anyday now

For a reality check look at the poll at the head of the thread 75 $ by xmass ,
next , you are going to tell me nobody fidlled with the WTI index since two weeks

.

[MrBill]

EURUSD is not particularly over-bought at the moment. $1.4000 is the target, but at $1.3810 it is only 73.68 on the RSI and has its trade envelope resistance (TER) at $1.3925.

It can still run a bit. Some are talking about $1.4300 yet this year? But others see it near $1.3500 ahead of year-end. I think it will depend on how the sub-prime fiasco pans out. JPM is predicting US house prices to decline by 15-20% over the next 2-3 years. If so, there would be considerably more home-owner defaults, and that would not calm credit markets, much less buoy consumer spending.

I think we can expect the US dollar downtrend to continue until some of the US' fiscal imbalances are addressed. I am not so much worried about the US trade deficit, as US exports are at record highs due to a weaker USD, but if there is zero progress on reining in deficit spending, not likely if there is a housing meltdown, then I really can see no fundamental reason to become dollar bullish?

In the short-term one benefit to the USD is the EURJPY correcting lower from its high of 169. It is 166 now and has room to fall to 165 or even 162. Although there is support (TES) at 165.75.

EUR loses some support if there is an unwind of the yen carry trade as dealers might sell AUD, CAD, NZD, etc. (all at decade(s) long highs) and buy JPY, usually via the USD as it is more liquid than the crosses directly.

Same story for the JPY. TES was at 120.50 and it is already 120.20, so it can continue to fall, but with an RSI of 33.50 it looks like it is getting ahead of itself. You can tell that I like orderly declines as opposed to free-falls. I do not always get my wish.

I agree with the gold comments. XAU (and XAG) are nearing their resistance (TER) at $688 and $13.50 respectively. They have been given a boost by the weaker USD, and inflation fears. Copper and nickel are both slightly lower. Ironically, at least for me, is that the 10yUST has a yield of just 4.92%, so it is not reflecting those same inflation expectations. Mind you that is also a flight to perceived quality from the fall-out in the credit markets due to sub-prime woes.

Fed's Poole sees "inflation moderating 'a bit', but not convincingly". Even their prefered core-PCE is still at the high side of their comfort range at 1.9%, so with unemployment still low near 4.5% the Fed will have little room to cut rates quickly. They will more than likely stay on hold until further notice. Not a bullish USD factor, while other CBs continue to tighten.

But given JPM's predictions about home-owner defaults the Fed will really hesitate to actually raise rates unless the evidence is overwhelming that higher global inflation is not under control. One year LIBOR has only nudged up slightly to 5.38%, so money market traders are not betting heavily for higher rates to come over the next 12-months.

I am trying not to pee my pants and close my long $69 puts in the WTI. Spot has lost $2 since I put them on last week, so they are up about 26% this week. A tidy profit, but we may just be getting started in the crude price correction, so I should be patient.

However, both nat gas and unleaded gasoline are almost over-sold with RSIs of 30.78 and 33.46 respectively, while the WTI has moderated from over-bought to an RSI of 58.56 which is in neutral territory. Large buying in RBOB might trigger some short-covering in the WTI as well.

In a perfect world I would close my $69 puts ATM in the WTI when we reach that level on this correction, and then buy OTM gasoline calls for the bounce higher/start of the next rally. But let's see if I have the balls to wait that long?

Most oil stocks closed down yesterday on profit taking and a weaker general market. The Dow was down 1.55% while the S&P500 was down 1.9% and the Nasdaq down 1.85%. The commodity heavy TSE was down 2.73% and the S&P500 Energy Index (GSPE) closed down as well. The GSPE topped out at 576.32 and now looks like it may test 540 or even 518 on this correction, unless we regain some upward momentum on the crude itself and refining margins in particular.

So in summary, it would look like a lot of markets have turned the corner and we are in the midst of several important corrections. This may be only temporary or the corrections might be deeper and the start of a new trend. It is a little to early to say. Until then we just have to treat them as corrections and not a change in direction.

But the US dollar and stock markets are still going to be hyper-sensitive to any worsening in the US credit situation, and that is not likely to change anytime soon, so I would still sooner be a buyer on dips on any coming weakness in the commodity and energy sphere. Have a plan and stick to it. Discipline.

[BigTex]

There were some great stocks on sale this morning. Red all over the place. I picked up some GSF.

[MrBill]

Yesterday was a very distressing day for me, and not just because it was my anniversary and reminded me that my youth is slipping away!

After making new lows after the DOE inventory releases WTI and the products staged an impressive rally, dragging oil company stocks up with them. Not only did I not sell my WTI puts, but I did not buy RBOB calls or oil stocks either.

Market timing can be a bugger sometimes. I saw little in the inventory numbers that spooked me, and the US dollar even cooperated by strengthening (along with falling gold), so this was not a higher crude price on the back of a weaker dollar move.

Oh well, long options can only lose time value. I already know my maximum loss. My opportunity cost is something else.

Here is a summary

crude stocks -1.1 mio to 351 mio bbls (+5% YOY)
gasoline stocks +800k to 204.1 mio bbls
distillate stocks +1.5 mio to 123.7 mio bbls
blend stocks +900k to 92.5 mio bbls

refinery use +0.7% to 91.7%

imports +3k to 10.38 mbpd
product imports +407k to 3.91 mbpd

gasoline demand +1.2% to 9.66 mpbd
distillate demand +2.8% to 4.05 mbpd
total demand +1.2% to 20.93 mbpd

So as far as I am concerned not much deviation from previous trends. Slight builds against strong demand.

However, as was pointed out, unleaded way getting over-sold on the RSI, and it actually did touch its support (TES) at $2.0200 before taking off and touching a high of $2.1065 afterwards. That would have been a super entry point. Would of, could of, should of, eh?

WTI touched $72.90 before reaching $76.38 on the bounce. The S&P Energy Index rallied from a low of 550.60, but still ended up down on the day at 566.75. Likely because the S&P500 Index closed down at 1518.09.

EUR/JPY continued to fall yesterday and overnight to my first technical target of 164.65 from 168.98. I would now target 161.98 on further unwinding of short yen carry trades. This helped the USD recover against the EUR in the short-term testing $1.3708, but I would not expect much further EUR weakness beyond $1.3680. If that corresponds to gold near $660 then that might be a good entry point to re-test $687, but I would not rush into it.

UPDATE: meanwhile tighter credit spreads and more aggressive bond holders are putting a crimp in both private equity and corporate refinancing.
$this->bbcode_second_pass_quote('', ' ')John Casesa, a longtime auto analyst with the Casesa Shapiro Group, said, “I think the market has to reset, correct and find its proper level.”

The tightening will become a serious problem for Ford and other companies, Mr. Casesa said, if it is accompanied by a weaker economy, such as slower income growth, higher unemployment, higher inflation and lower consumer confidence.

“This puts much more pressure on the management of these companies to execute their operating plan,” Mr. Casesa said, “because they might not have many more financial options.”

Cerberus’s difficulty in finding takers for Chrysler debt is a sharp contrast to the situation carmakers faced until recently.

In March, Ford Motor sold its Aston Martin sports car brand to private investors for $848 million. In November, Ford tried to raise $18 billion to pay for its revamping and found so many interested lenders that it wound up borrowing $23 billion instead.

To be sure, it had attractive collateral. It mortgaged nearly all its domestic assets, including office buildings, patents and even its blue oval logo, and its holdings in Ford Credit and Volvo, the first time in its 103- year history that it had put up its assets in collateral.

[BigTex]

Today is starting with a bang as well. XOM misses earnings by 1%, and the whole sector gets hammered, while oil is going up. It's like a bunch of headless chickens.