Crude Oil Falls 24% This Week -- How Low Will It Go? (CHK)
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Crude oil has fallen another 4% today, pushing as low as $40.85. With today's continued move lower, the price of a barrel of crude oil has declined by about 24% in December, which has had only 5 trading days so far.
This month's sharp slide in prices have left oil & gas related stocks in the gutter, which, in turn, have dragged down prices in the entire energy complex. Among numerous once-high-flyers now in the doldrums, one name is sticking out today as it has seen unusually high volume on its way to a new 52-week low: Chesapeake Energy (NYSE: CHK).
Saying "Chesapeake has had a tumultuous 2008" would be an understatement. The stock doubled in the first 6 months of the year, hitting an all-time high at $74 by July, all while its CEO, Aubrey McClendon, gobbled up more than 33 million shares of Chesapeake. Soon after, as commodity prices tanked on concerns of a worldwide economic slowdown, Chesapeake's stock price tumbled to under $35, triggering margin calls on Aubrey's massive stake in his company. On Friday, October 10, Chesapeake disclosed that Aubrey was forced to liquidate the majority of his position, sending the stock to a 52-week low at $11.99.
With crude oil over $80 at this time, however, investors viewed Chesapeake's natural gas operations as a value and began bidding the stock up. Shares of Chesapeake quickly bounced to as high as $24.74 and most traders believed the stock had already put in a bottom.
Wrong. Crude's unraveling since has pushed Chesapeake back to "Aubrey liquidation levels" and today's sharp 15% slide has moved the company's stock to a new 52-week low of $9.84.
So when will the madness end? Well, if you listen to the pundits on CNBC... sanity seems to be no where in sight. Each day, more and more contributors come on the air saying crude will continue lower, with numerous analysts predicting a price as low as $25 over the next few months. At the same time, Wall Street analysts have been relentlessly cutting price targets on oil & gas related stocks such as Chesapeake. Anyone catching my drift yet? "More and more"... "relentlessly cutting price targets"...
As a contrarian, increasing negative sentiment like this causes my ears to perk up. Let's think back to the summer when a barrel of crude oil was near $150 and every analyst was raising estimates to close to $200...
This is not a bottom call -- rather, a simple reminder that it is very easy to get caught up in the hype and that this is exactly the kind of environment that breeds near-term relief rallies.
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