PARTY OVER?

The WTI goes through US$54/bbl, most of energy stocks go down! Is the energy party over? Are we too late for the party? Or is this just some wanting to exit the party earlier?

Let's review the PROS and CONS of the energy plays.

PROS

• It's the commodity price, stupid;
• Valuations remain reasonable;
• Analysts only start to move up the commodity pricing projections for 2005, most still use US$35 for oil and US$5.75 for gas;
• Results for Q3/04 will be good for most, notwithstanding the wet weather;
• On the other hand, Q3/04 for most other sectors will be disappointing, forward guidance will be cautious; Energy is the best place to hid;
• This is traditionally the strong season for energy stocks, particularly for gas producers;
• Demand and supply appears to support the high energy price;
• The trend is certainly not broken;

CONS

• It's best to sell at top;
• It's a bubble and it will burst;
• Speculative money could gone in a flash, and they may have exited already;
• This level of commodity price is not sustainable, as it will inevitably lead to an economic recession, which in turn will lead to lower energy demand, and lower commodity price;
• Near term uncertainty (election, Iraq, Nigeria, Gulf of Mexico) could be resolved;

I could go on and on, and both sides have strong arguments. In its totality, the PROS may appear to have an upper hand here. To the minimum, we ought to let the Q3 earning season runs its course. I doubt that poor overall results / strong energy results would do too much harm to this sector.

We do need to address the scenario where the commodity price declines precipitately, from $53 to, say $40 in the near term. What will happen to energy stocks? I have no doubt that most energy stocks will fall, some significantly, particularly those who had a spectacular run (CUX comes to mind). While long term fundamentals may continue to be favorable, I believe A SELL is in order. You can always pick up later. I personally do not believe this scenario will materialize, but I can't emphasize more: PROCEED WITH CAUTION.

INTC met, guided in line, and up modestly after market. YHOO exceeded and raised guidance, but down slightly after market (go figure). Most other announcements seemed to be misses or lowering guidances. The general tone of the market is slightly positive, probably driven by the reversal of oil and INTC's results. Expecting a positive opening tomorrow. Energy appears to be under pressure and the day-reversal did not look good.