New Currency Problems Pressure Oil Prices

Jim Brown
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Renewed worries over Portugal and Ireland caused the Euro to take a dive and provided support for the dollar. The currency fluctuations were blamed for pushing crude prices lower but you would have had to use a magnifying glass to see the decline.

The cost to insure debt sold by Ireland and Portugal rose to new record highs. This rekindled worries over Greece as well. The major global analysts like Pimco's Mohamed El-Erian, believe Greece will eventually default. Quite a few analysts believe Greece will drop out of the European Union so they can manage their own currency and inflate their way out of the mess.

Greece has almost disappeared from the daily headlines but the Portugal and Ireland situation is heating up and that rekindled the Greek fears. Worrying about sovereign debt defaults is not what you want to be doing when you are betting on rising demand for oil.

The continued debt problems suggest there is a bigger problem in the future and that will be the disintegration of the EU with countries like those above dropping out. The Euro was supposed to be this super currency but the EU did not police its rules and let member countries run up large amounts of debt. Now they have no way to pay it off.

If these countries begin defaulting the Euro is going to take a major dive and that will rocket the dollar higher and disrupt all the "short dollar, long equities, commodities, etc trade." There would be a major short covering spike in the dollar and a corresponding decline in equities.

This is not expected any time soon but Ireland and Portugal are seriously in need of a bailout if the EU is going to stave off the disaster.

The slight dip in crude prices did not really hurt energy stocks and the sector was mixed more on individual stock news than some generic currency worry.

Anadarko Petroleum (APC) had been up strong the last two days on talk that BHP might try to acquire APC now that the Potash deal is dead. Today an analyst at Sanford C Bernstein said BHP is more likely to go after Woodside, an Australian company, than APC. That knocked shares of APC for a -7% loss.

BP and Cnooc Ltd (CEO) are going to announce a major deal to explore in the South China Sea and CEO rallied +$4 on the news. BP declined slightly because the Oil Spill Commission said although they did not create a safety problem because they were cutting costs they were lax in their management of the well and slow to react to changes. This is good news in one sense because the government can't find them criminally negligent on the cost cutting resulting in death count. However, the finding BP was lax in its management could be one more step towards a gross negligence finding. There are between eight and fourteen specific points that officials claim were strikes against BP in creating the disaster. The difference in the number depends on how nit picky investigators want to get.

The panel has found that BP "missed signals" that could have prevented the spill. The catastrophe stemmed from "several very human decisions made by competent persons who missed signals," said William Reilly, co-chairman of the National Commission on the BP Deepwater Horizon Oil Spill. "It's very difficult for me to conclude there was not a culture of complacency with everything involved with this experience," Reilly said at the conclusion of yesterday?s hearing.

Transocean garnered an upgrade from Barclays Capital with a price target of $77 from $70. Barclays said deep water drilling is brisk and rig rates appeared to have stabilized. I assume they are talking globally and not including the Gulf. Transocean shares gained over $3 on the news and Diamond Offshore picked up a couple bucks as well.

Percentage wise Cameco (CCJ) was the big winner with +7% gain to a new high after posting strong earnings and raising guidance. Production increased +17%, costs were lower and sales prices were higher. Sounds like the uranium story was just confirmed. Cameco said it will deliver a third of its annual sales volume in Q4 and prices are rocketing higher. Uranium spiked +10.6% over the weekend alone.

I still believe the best game plan for any investor today is to be heavily invested in the energy sector, primarily oil stocks but with a few strays like Cameco where the story is not widely known but it is making headlines. We have a lot of these stocks in our OilSlick portfolio. Those who have been reading OilSlick for the last ten months have done very well.

Jim Brown

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