The End of High Oil Prices and Peak Oil?
Should Investors Sell ARD Shares Based on Decline in Oil Prices?

Volatility in Oil is Normal

This is the shoulder season....for starters. What this means is that the need for oil products is at a seasonal low due to lack of heating and cooling requirements.

The worldwide oil supply and demand the picture is very bullish. Nothing has changed.

Note how Q2'06 supply is less than Q2'05 supply. In fact it is 500kpbd less. Now look at demand. Demand in the most recent quarter in which data is available (Q1'06) is higher than year ago numbers. It is 900kbpd higher.

Now look at this chart:


(Click on Image to Enlarge)

Last year in 2005 we hit about $69 in mid August. The first week of November we hit about $57. This represents a $12 drop or 17%.

Fast forward one year to 2006 and we hit a high in mid August of $78. We are one week from October and at $60. This represents a $18 drop or 23%. This decline has lasted 6 weeks so far.

If we go back to 2004 we see that there was a major sell off in oil prices between October and December of that year. In October 2004 oil hit a new high of about $55. It sold off after making that new high to about $41 in December of 2004. This represented a $14 sell off or 25%. This sell off lasted about 6 weeks.

Percentage wise we may drop another couple percent to hit a $20 drop (25% decline) from our high of $78...maybe close at $58-59 for a day or two followed by a final goodbye to the $50s before oil goes above $60. OPEC may be a driver of pushing oil back above $60 by either announcing a cut or even the mere WORRY of an OPEC oil cut. You can bet that the oil bears will begin to become fearful with their short positions when oil goes below $60.

As far as duration goes we have been in this bearish funk for 6 weeks now. While the sell off in oil lasted longer in 2005 (17% drop) the sell off in 2004 was more pronounced (25%) but the decline was shorter lived (6 weeks.)

ARD Volatility is Normal

ARD has seen two drops in share price in the last year previous to the current decline. On January 23, 2006 ARD closed at a high of $36.47. Six weeks later it closed at a low of $26.33. The represents a 27.8% decline. Keep in mind that the duration of the decline was 6 weeks.

The second occasion in which ARD shares declined had the peak on May 10, 2006 when the shares closed at $36.20. Five weeks later the shares hit bottom on June 13, 2006 when they closed at $26.36. This represented a 27.1% decline. Again the duration was 5 weeks.

Most recently ARD hit a high of $40.64 when it closed on August 26, 2006. Yesterday ARD closed at a low of $30.61. This is a decline of 24.6% in a period of 4 weeks. Given the fact that the most recent decline has been more dramatic one should expect the duration to be shorter lived.

In conclusion, based on duration as well as percentage decline I think we are extremely close to a bottom. Contrary to what some have said we have NOT broken a multi-year upward trend. The worldwide supply demand issues have not changed. The decline in ARD shares is nothing new. Volatility is normal. Don't be fooled into thinking that peak oil, high oil prices and prospects for success at Arena Resources Inc. are over. This is just the beginning.