Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Oil Prices

The price of oil is usually measured on a per-barrel basis. The price also can be quoted as the spot price, which is the price of buying a barrel at the current moment, or as the futures price, which is the cost of buying a barrel of oil in future months. Two main contracts traded are West Texas Intermediate (WTI) and Brent Crude. WTI oil is light sweet oil and very well suited for gasoline. Brent Crude is a blend of oil from the North Sea. Futures prices are quoted in increments of 1,000 barrels of oil for every one contract.

Why the Old School Dow Theory Still Applies

By for Profit Confidential

The Most Important Stocks to FollowGetting a sense of where stocks are going to go in the year ahead is always difficult with the major indices at their all-time highs.

The fundamental backdrop is still very favorable for equities. While the Federal Reserve has put off raising interest rates for the near future, the cost of capital, especially for corporations, remains extremely low. And corporate balance sheets remain in excellent condition with strong cash positions and good prospects for rising dividends going forward.

The stock market recovered extremely well from the financial crisis and subsequent crash in 2008/2009. But it wasn’t until early 2013 that I saw the beginning of a new cycle for stocks, or a bull market as it were.

Until then, I viewed the market’s performance purely as a recovery period from the previous cycle, which was the technology bubble.

Many of the technology stocks have only now recovered to their previous highs set in 1999 and 2000. The recovery cycle took a long time to play out and the catalyst for its breakout was, not surprisingly, the Federal Reserve.

Stocks can move significantly higher in a rising interest rate environment, but only from a low base, which is what we have now. And within the context of a new market cycle or bull market, the economy can experience a full-blown recession and stocks can experience meaningful corrections.

The two most important catalysts for the equity market near-term are what corporations actually report about their businesses and the Federal Reserve’s actions.

The surprising weakness in oil prices should be evident in corporate financial results (especially in the fourth quarter). Old economy industries … Read More

My Top Value Play in Bakken Oil

By for Profit Confidential

Top Value Play in Bakken OilThe weakness in oil prices was pretty sudden and has changed the financial dynamics for many producers. Typically, weaker oil prices are slow to translate into lower prices at the pumps.

Domestic junior oil stocks have been hot commodities until recently. Many of the market’s best growth stocks in this sector continue to be expensively priced and finding value has been a difficult endeavor.

One company we’ve considered before in these pages is Northern Oil and Gas, Inc. (NOG). (See “My Favorite Bakken Oil Play.”) This outfit is based in Minnesota and operates in North Dakota and Montana. The stock is not expensively priced, and the company is back online with solid sequential growth in production.

Northern has experienced infrastructure problems and weather-related issues that have hampered well completions, but the company’s latest quarter was a big success and full-year 2014 production guidance was upgraded to between 20% and 25% growth over 2013, compared to previous guidance of 15%.

According to Northern, its 2014 second-quarter production grew 17% sequentially and 41% year-over-year to 1.4 million barrels of oil equivalent (boe), averaging 15,369 boe per day.

The company’s total oil and gas sales in the second quarter of 2014 increased dramatically to $121 million, compared to $80.0 million in the second quarter of 2013.

But management incurred a significant loss on the mark-to-market of a derivative instrument and on the settlement of a derivative instrument, which resulted in actual second-quarter revenues being knocked down to $74.6 million, compared to $96.0 million in the second quarter of 2013.

As a result of the derivative loss (perhaps the reason why the … Read More

Why Are Oil Prices Collapsing?

By for Profit Confidential

Global Economy Just Getting WeakerOil plays a critical role in economic growth as oil is used in a variety of industries. In times of economic growth, oil prices rise. When the economy is soft, or getting soft, oil prices fall as demand for oil wanes.

Over the past two months, oil prices have collapsed for the simple reason that the global economy is getting weak.

The chart below shows the steep sell-off in oil prices that started in mid-June.

Light Crude Oil-Spot Price ChartChart courtesy of www.StockCharts.com

What’s interesting to note is that oil prices are falling at a time when we have numerous troubling events in the Middle East and Russia. In normal circumstances, these developments would have caused oil prices to soar.

One more chart I want to show you today (which continues to spell trouble ahead for the global economy) is the Baltic Dry Index (BDI). Since the beginning of the year, this indicator of global economic activity has been collapsing.

Baltic Dry Index ChartChart courtesy of www.StockCharts.com

Since January, the BDI has fallen 45%. The BDI is an indicator of trade in the global economy; the less trade in the world, the weaker the global economy.

Over the past few months, the chances of the global economy witnessing an economic slowdown have risen significantly.

As I have been writing, the eurozone is in very deep economic trouble again. Japan, the third-biggest hub in the global economy, is begging for growth. And the manufacturing and real estate sectors in the Chinese economy are slowing at a staggering rate.

The continued growth of the global economy is critical for the U.S. economy. In 2012, 46.6% of the S&P 500 … Read More

Big Growth Ahead for These Three Shale Oil Plays

By for Profit Confidential

Three Shale Oil Plays with Good UpsideI was listening to hedge fund guru and energy baron T. Boone Pickens on CNBC the other day and, as he always has, he wants to stop the flow of OPEC (Organization of the Petroleum Exporting Countries) oil into this country. This, folks, is not fiction; it is actually realistic, given the surging production of domestic shale oil and natural gas. Pickens wants to create a North American energy partnership through which the United States would align with Mexico and Canada to develop an energy conglomerate.

In my view, this makes sense, and it could perhaps drive oil prices lower, which could create a buying opportunity for investors (albeit I doubt the big oil companies would want such a thing to happen).

The oil patch is driving riches from Texas to North Dakota and Montana. The price of West Texas Intermediate (WTI) crude is holding above $100.00 per barrel.

The key to energy independence will be the ability to drive shale oil production higher. Consider that in 2012, shale gas represented 39% of total natural gas production in the United States, making it the top shale oil producer worldwide, according to the Energy Information Administration (EIA). Canada came in second at 15%. The numbers are estimated to get even bigger and with this, I see a buying opportunity.

Even the “cartel” OPEC realizes the impact of shale oil on its operations. In a report undertaken by OPEC in 2013, the cartel estimates a decline in its market share as shale oil production rises. (Source: Lawler, A., “OPEC to lose market share to shale oil in 2014,” Yahoo! Finance web site, … Read More

Why It’s Not Too Late to Enter the Hot Oil Sector

By for Profit Confidential

Oil Sector Hot Here's How to Get in on the ProfitsThe spot price of oil is holding up and there are countless oil stocks pushing their highs.

If the 1990s were the decade for technology stocks, then the 2010s are the decade for independent oil producers.

While the largest integrated oil and gas companies are struggling to grow production, mid-tier, independent producers are filling the gap, and there are countless growth stories in the marketplace.

EOG Resources, Inc. (EOG) has been a top stock market performer and is likely to continue ticking higher. The company has net proven reserves of some 2,119 million barrels of oil equivalent, of which 94% is located in the United States.

Of the company’s total 2013 production, 88% came from the U.S. and Canada, representing a nine-percent gain over 2012.

First-quarter 2014 earnings were $661 million, compared to $495 million in the first quarter of 2013.

The company’s total crude oil and condensate production rose 42% over the comparable quarter last year, and management has significant hedges, locking in oil prices just under $100.00 a barrel. Approximately 30% of North American natural gas production is hedged for the remainder of 2014 at a weighted average price of $4.55 per million British thermal units (MMBtu).

The Street expects EOG Resources to grow its revenues by about 17% this year and about seven percent in 2015.

Previously in these pages, we looked at Cimarex Energy Co. (XEC), which has been very strong on the stock market since the beginning of February. (See “Where to Find the Best Price Momentum Right Now.”)

This oil and gas growth story is slowing, but the company is still expected … Read More

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