By Duncan Sutherland – Exclusive to Crude Investing News

Hedging?

The phenomenal resurgence of oil futures on the final day of October delivery contracts (NYMEX) approached sixteen and a half dollars to close in the US$120s.

Two competing theories have been presented. It is argued that the American government’s massive reaction to the financial sector crises has restored confidence and allayed existing fears of further demand destruction and recession. To my mind, the more persuasive theory is that hedge-funds and institutional investing houses remain deeply worried that the financial sector will not recover, and are thus flocking back to commodities.

This opinion is shared by my colleague Dave Brown who writes for our sister site www.goldinvestingnews.com. With both oil and gold performing strongly, it seems that the collected wisdom of the markets is to move your money away from ephemeral financials towards the ever-popular hedge of “things that come out of the ground.”

As the crisis continues to rock markets around the world, expect to see more variance in the relative performances of financials and commodities. Investors want to react quickly, and the indices should see dramatic rollercoastering as good and bad news compete for prominence.

The expiration of October trading certainly played a disproportionate role in the record one-day gain, as it exercised a huge pressure on short positions. The meteoric rise also illuminates how much the vacillation is due to speculative activity.

Company news

If I were an executive at Shell, (NYSE:RDS.A) I would be rather concerned about my company’s global position. There is good news for the natural gas division, as Shell and the Iraqi government put ink to paper on a multi-billion dollar joint venture for production in Southern Iraq. This deal has a 51-49 per cent split in favour of the government run Iraqi South Oil Co. and also calls for multiple new LNG plants. Despite the relative stabilization of Iraq (If you are interested, Dexter Filkins’ piece in The New York Times is superbly reported and offers trenchant analysis)

The bad news for Shell is certainly worrying. Benchmark examined the situation in Nigeria’s Delta state last week amid escalating violence by the militant MEND group. A sixth attack was executed over the weekend, destroying a pipeline, forcing Shell to declare force majeure. With Shell’s position in Nigeria being decades old and capital intensive, the giant may have to wait and see how this turns out.

MEND has apparently now declared a unilateral ceasefire, which appears to be a defensive tactic to prevent Nigeria’s military from mobilizing against it.

Further, some large British investment houses are explicitly warning Shell to stop investing in the Alberta oil sands, declaring it ethically problematic, and these properties account for almost one third of Shell’s proved reserves. Should oil prices drop further, the US$65-75 per barrel range may well prove fatal for oil sands projects.

Tanganyika Oil Company (TSX:TYK) saw a huge boost too stock prices when it announced that talks were underway with a potential buyer, possible Oil and National Gas Corp of India.