13 September, 2007

$80 Oil and the Effect on the Marketplace, Time to Book Profits but Still Watch Energy Stocks

Price stabilization; the new key buzz word coming out of investment circles around oil futures. Consumers want it, oil companies probably not so much. Record breaking profits have become the norm at Exxon Mobil (XOM) but the average consumer will continue to feel the pinch at the pump.

OPEC, the world's oil production oversight organization, instilled an increase in production of 500,000 barrels per day in order to achieve some form of price stabilization. The fear of a sharp decline in oil stock piles has led to a continued surge in prices. Oil prices broke through a record barrier today and closed above $80.

Exxon, the largest of the "big-oil", rose another 1% to close at $88.62. Still $5 off its all time high, hinting that momentum and the market theory of "$80/share leads to $100/share" could be in full effect. Exxon stays shy of a half a trillion in market cap and with oil at these levels you have to wonder whether its just a matter of time before the company crosses that barrier. The one wild card is the Fed meeting on September 18th which could put a wrench into the spokes of this mini-recovery rally.

On the Canadian side of oil related news; Encana (TSE:ECA), Petro Canada (TSE:PCA) and Canadian Oil Sands Trust (TSE:COS.UN) are climbing back towards 52-week highs. Still a few dollars left to go for ECA and PCA but if supply fears continue to press on the market these companies will be breaking barriers left and right. They are the two prominent Gas and Oil companies the TSX has to offer. Canadian Natural Resources (TSE:CNQ) is eyeing its $78/share high after a 2.5% up day. CNQ has come far from its January lows of $53/share and as with, most of the Energy Sector in Canada it would be a great time to book some profits. For CNQ, the Alberta based oil and gas exploration play, I would like to see another pull back to the low 70s, high 60s before buying up more. This company has its headquarters in the sweet spot in Alberta's oil industry and has raised output guidance in its latest report. The anticipation of sustained greater output coupled with the rising commodity environment have spearheaded CNQ's run to its highs.

Buying into Oil at these levels I think is risky, as psychological record levels of $80 a barrel are broken. I would expect a slight pull-back in Oil prices from these levels as price stabilization comes into effect providing more workable supply numbers for the coming months. While some predict oil to reach $100 sooner rather than later, my stance would be that oil will sustain itself close to, but lower, than these records levels throughout the upcoming winter months.

Disclosure: Author is long CNQ

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