One of the best pieces of advice I ever received was "Right or wrong sometimes you have to make a decision." Despite a great earnings report from ConocoPhillips (COP), most of the major integrated oil stocks closed well off their highs for the day.

The last time I saw this type of price action after a super quarter was back in early 2000 when Cisco (CSCO- trading at $60 then)released phenomenal earnings and the stock stood still. This told me that the smart money was selling, while the dumb money was buying. Believe it or not, I could only get a handful of clients to sell because others did not want to pay capital gains, and others thought it was going higher.

At 10:30 ET the Department of Energy released its weekly storage numbers. The report said that stockpiles of crude increased more than expected in the latest reporting week. Crude oil began immediately selling off closing down $1.79 to $60.65 a barrel.

Energies

Crude Oil (CLZ5) Dec 05 60.61 -0.05
Crude Oil (CLF6) Jan 06 61.18 -0.02
Crude Oil (CLG6) Feb 06 61.60 +0.01
Crude Oil (CLH6) Mar 06 61.82 -1.46
Gasoline Unleaded (HUZ5) Dec 05 1.6220 +0.0009
Gasoline Unleaded (HUF6) Jan 06 1.6530 +0.0014
Gasoline Unleaded (HUG6) Feb 06 1.6770 +0.0074
Gasoline Unleaded (HUH6) Mar 06 1.6811 -0.0654

As I had stated this morning, If the $58/bbl mark is broken, we could see a much larger move to the downside.

A QUESTION FROM A READER:

Do you feel MRO is a good purchase at these levels, even if it is not acquired? I ask, b/c there is no telling if/when such an acquisition will take place.

RESPONSE:

If you are an investor with at least a 2-4 year time horizon, and don't own the stock, there is nothing wrong with taking an initial position at these levels. Keep in mind, as an investor, you plan to hold the shares, and add to your position on weakness to complete your pre-determined allocation.

If you are a trader, I have not been impressed with the energy sectors manic response to $60/bbl oil prices. The selling has been vicious, and is acting more like oil had move from $70 to $40 rather than $70 to $60.

This reaction tells me that a much larger move to the downside could be in the works. In 2006, I would not be surprised to see crude trade down to $50 or below. When you take into consideration that the U.S. economy is hugging the border of a market top and an early recession, this is about the time that energy sector begins to go out of favor.

The only ray of hope hanging on the energy sector is world demand. In past market cycles we did not have this issue. So, the bottom-line is this; despite world demand, oil and energy stocks can still correct sharply. This correction would obviously be a major buying opportunity.

As far as the takeover prospects of Marathon (MRO) is concerned, I agree, no one knows when it will happen. It could be tomorrow, or two years from now. But, given the refining problems facing our nation, MRO is an extremely attractive acquisition. Given the time and expense involved in building a new refinery, it would be cheaper for a major oil to buy, rather than build.

Marathon recently purchased all of Ashland Oil's refineries, and has very little exposure to the Gulf Coast. If I owned a major integrated oil company, this purchase would be an easy decision.

If MRO happens to fall to $50 or lower from current levels, I feel that a takeover price of $70-$75 is still possible.

BACK TO DECISION TIME

A few weeks ago, we sold Chevron (CVX). We still own XOM,SLB,MRO and CHK. Since the winter months are right around the corner, I do not think the next big sell off will come until mid-late winter. When you add in the fact that the Republicans are trying to get off the mat after taking a beating in the polls, I think they will be able to engineer a drop in the price of oil well ahead of the mid-term elections.