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Oil nears $50: Is this a buying opportunity?

Today's Financial News - Posted November 6, 2008

Energy prices are in play. European interest rates are falling and taking crude prices with them. Companies all across the energy sector, like Peabody (NYSE:BTU) and Massey (NYSE:MEE) have seen their prices slashed. This is a great buying opportunity.

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): This is turning out to be a big week for the energy markets. Prices for commodities like natural gas, coal, gasoline, diesel, and of course, crude oil are dropping precipitously. Right now, we are very close to some critical pricing levels. If we drop below them, even bigger declines could be on the way.

First off, let’s look at the king of all commodities, crude oil.

As I write, a barrel of crude is just $1.27 away from trading for less than $60. Many energy experts believe once oil drops below that crucial level, there is nothing stopping it from dropping drastically lower. With a little help from a strengthening dollar, we could see a barrel of crude trading in the $40 range by the end of the year. $30 is a stretch, but it is not out of reach.

Thanks to interest rate cuts in England and throughout Europe today, the dollar stands to continue its currency domination. When London announced it slashed its key interest rate by 150 basis points, the value of the dollar jumped almost immediately.

It now takes $1.58 to buy an English pound and $1.27 to buy a euro. Both figures were climbing over the past week, but thanks to today’s widespread increases in liquidity, European currencies are one again dropping in value. They will drag oil prices down with them.

But crude is certainly not the only source of energy on the decline. Even after a surprisingly low weekly build in natural gas inventories, the popular source of home heat is trading well into negative territory. Right now, a million BTUs of gas is trading for $7.19. Technical analysts believe if it does not close above $7.30 today, we are in for another major drop.

According to a report by the energy department, natural gas supplies are not quite as high as most experts believed. Over the last week, inventories grew by 12 billion cubic feet. The consensus estimate was for growth of nearly twice that figure.

It is important to note that inventories are 3.7% below where they were a year ago. That is a clue that the fall in prices was not necessarily caused by a reduction in demand. It is a sign that speculators have been forced from the market.

The bullish side of energy

Finally, it is important to look at coal prices. Thanks to ArcelorMittal’s (NYSE:MT) announcement yesterday that it will slash its production capacity by as much as 35% in the coming months, the coal industry has suffered significant setbacks.

Coal giants like Massey Energy (NYSE:MEE) and Peabody Energy (NYSE:BTU) have been significantly wounded over the past two days. They have given back all of the gains they made last week.

Fortunately, there is a glimmer of hope on the horizon. ArcelorMittal promises it will boost production in mid-2009. That means coking coal will jump in demand and the companies that produce it will see their valuations increase significantly.

That is great news for James River Coal (NYSE:JRCC). Shares have been reduced by dramatic proportions and are dirt cheap today. I stand by my recommendation to buy the company’s stock.

The energy industry is in flux. For folks with a long-term bullish sentiment like I have, this is a great buying opportunity.

Remember… Buy when everybody else is selling.


Next Article: European banks cut prime rates: Too little, too late!

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Posted by Andrew Snyder · Filed Under Oil and Energy 

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