HardAssetsInvestor

Written by Sumit Roy  |

December 05, 2012

Freeport’s $20B Acquisition Fuels Industry Takeover Talk; Oil Looks Ripe For A ‘Cliff’ Trade

Details

We take a look at the latest developments in the oil market, including charts of all the major inventory categories.

The Department of Energy reported this morning that in the week ending Nov. 30, U.S. crude oil inventories decreased by 2.4 million barrels, gasoline inventories increased by 7.9 million barrels, distillate inventories increased by 3 million barrels and total petroleum inventories increased by 5.9 million barrels.

Crude oil prices were slightly lower after the release of the latest inventory figures. Brent and WTI remain firmly locked within their respective trading ranges, as can be seen from the charts below.

BRENT

WTI

Just as the technical landscape for oil remains unchanged, so too does oil’s fundamental backdrop. Little progress has been made on the “fiscal cliff” negotiations in the United States, but a deal is still expected by year-end.

Once the issue is resolved one way or another, markets will weigh the fiscal cliff saga’s impact on the economy. Some analysts have suggested that the uncertainty caused by the standoff in Washington will significantly dampen economic growth next year regardless of whether politicians eventually reach a deal by the end of the year. Others say the impact will be minimal.

We expect that a fiscal cliff resolution will lead to a quick bounce in all risk assets, oil included. But beyond that, markets will quickly turn their attention back toward economic data for guidance.

An attractive trading opportunity has thus presented itself ahead of a likely deal to avert the fiscal cliff. We would look to buy Brent and WTI near the $107 and $85 levels, respectively, and sell shortly after the post-fiscal-cliff-deal rally.

Shifting gears to industry news, copper and gold producer Freeport-McMoRan purchased two energy producers for $20 billion today. The mining giant is now returning to the energy sector after spinning off its energy segment in 1994.

The tremendous energy-related investment opportunities in the United States—as evidenced by the surge in U.S. oil production, natural gas production and related infrastructure— have attracted much interest from conglomerates around the world. Another mining giant, BHP Billiton, purchased U.S. natural gas producer Petrohawk last year in a deal worth $12 billion.

The acquisitions have fueled takeover speculation in a number of independent oil & gas producers in the U.S., including EOG Resources (NYSE: EOG), Continental Resources (NYSE: CLR) and Pioneer Natural Resources (NYSE: PXD), among others.