Some comments from Jim Brown at OptionInvestor.com from this weekend.
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Today we have to make a decision on adding additional oil positions. Each day that oil rises and the leading oil stocks hit new highs my indigestion level rises. However, we can't let these issues force us into an emotional decision. According to several oil analysts I follow at least $10 of the current price of oil is related to those geopolitical concerns listed above. Should tensions ease the price of oil could hit $58 very quickly.
While the Iran problem is not going away any time soon it is also not going to come to a head for several months. Once the news fades we could see reduced pressures on oil prices until it heats up again in the fall. It could take months to make it to the security council and Russia and China both have a veto that could remove it from consideration. I can't justify investing on oil at an all time high based solely on Iran.
The North Sea problems will be resolved shortly and production restored. That is the easiest of the problems to bet on. It is a sure bet that production will be restored soon. The problems in Nigeria may not go away but they can't get much worse. Of the 350,000 bpd that could be impacted due to a total shutdown of Shell's operation more than 200,000 are already offline. The odds of much more being taken out are slim. There may be some small amounts but it would be nearly impossible to shut them down completely. Production in the Gulf of Mexico is slowly returning. 175,000 bpd is expected to come back online over the next 30-60 days. Nothing should interfere with that process.
Increased oil prices are producing higher gasoline and diesel prices and that should keep a lid on demand during Feb/March. That will help inventories build and take the pressure off oil prices.
All of this is simply conventional wisdom based on the theory that no new disruptions appear. Problems will be resolved and demand will slow over the next two months. Prices should revert back to the 50-day average between now and the summer demand cycle. "Should, could, might and probably" are the key words in the preceding paragraphs. Nothing guarantees oil prices will go down.
However, that puts me right back between the same rock and hard place that I have been in for the last four weeks. To buy the potential top or wait for a retracement. Despite my extreme consternation about the missed profits I refuse to buy the top. Friday's close at $68.55 was a four-month high. The post hurricane high on the now current March contract was $70.95. I would like to believe that $70 is a sentiment top that will hold. The term double top comes quickly to mind. Yes, hope springs eternal.
Right now support at $64 looks like a bargain but stronger support at $58 would be a much nicer retracement. No, I am not on drugs but living on hope. We all know how fast oil corrects when traders take profits and we have seen many $5-$6 drops that occurred in just 3-4 days over the past several months. Eventually we will get a drop like that. You may remember the last one from $63.45 to $58.10 that occurred between Dec-13th to Dec-21st. That was the one that stopped us out of our last batch of oil plays with the selling climax on the 27th.
Of course there is always the question of the demand slump. Given the time of year it is always possible we could get a retracement all the way back to $58. Wishful thinking maybe but a danger to us if we take an entry in the $62-$64 range I am expecting. It means we need to plan on spending the extra bucks for insurance once triggered.
Natural gas plays are history unless a new ice age arrives soon. Warmer weather continues to allow inventories to remain well over the 5-year average and the clock is rapidly expiring on winter. CHK is struggling to break resistance at $34 and without some cold weather it may be a futile attempt. <<<
AI
