Analyst upgrades:

• FBR Capital upgraded Overseas Shipholding (NYSE: OSG) to Outperform from Market Perform following the Q3 results as it believes the worst quarters are behind the company. The firm raised its target on shares to $48 from $35.
• Deutsche Bank upgraded Corporate Executive Board (NASDAQ: EXBD) to Hold from Sell following the Q3 results to reflect the company's lower costs. The firm raised its target on shares to $22 from $18.
• RBC Capital upgraded Enbridge (NYSE: EEQ) to Sector Perform from Underperform after the company's partnership produced significantly higher than expected DCF. In addition, the firm raised its price target by $5 per unit to $46 to reflect an improved distribution schedule and more favorable debt leverage.
• Royal Dutch Shell (NYSE: RDS.A) was upgraded to Neutral from Underperform at Credit Suisse.
• BioForm Medical (NASDAQ: BFRM) was upgraded to Overweight from Neutral at Piper Jaffray.
• Alliance Data Systems (NYSE: ADS) was upgraded to Buy from Neutral at SunTrust.

Demand rose after China eased restrictions on fuel prices last December, and that translated a record second-quarter profit for Asia's biggest refiner, China Petroleum & Chemical Corp., also known as Sinopec.

Beijing-based Sinopec's net income surged to 22 billion yuan ($3.22 billion) in the three months that ended June 30, according to estimates by Bloomberg News. That easily topped the analysts' consensus estimate of 15.8 billion yuan.

Who said big oil was a dying business? Fortune has released its Global 500, their "annual ranking of the world's largest corporations," and topping the charts is Royal Dutch Shell (NYSE: RDS.A), which, much like a Mariah Carey song, bumped up into the coveted number-one slot after some time at number three. The Netherlands-based oil company trumped its U.S. rival, Exxon Mobil (NYSE: XOM) by $15 billion in sales and saw its revenue spike nearly 29% from 2007.

Speaking of Exxon, the company once again had a tiger in its tank, ranking number two in the world as oil futures bounced around in a nearly $100-dollar range, hitting $146 per barrel at its heights.

Analyst upgrades:

• JPMorgan upgraded Franklin Resources (NYSE: BEN) to Overweight from Underweight to reflect performance and sales improvements, as well as benefits from the weakening U.S. dollar. The firm has a $94 target on the stock.
• Oppenheimer upgraded FormFactor (NASDAQ: FORM) to Outperform from Perform after channel checks indicated orders are recovering. The firm raised its target on shares to $30 from $22.
• KeyBanc upgraded Oshkosh (NYSE: OSK) to Buy from Hold citing the company's MRAP-ATV contract win, which they view as a "game changer." The firm has a $30 target on the stock.
• Novellus (NASDAQ: NVLS) was upgraded to Neutral from Underperform at Credit Suisse.
• Ternium (NYSE: TX) was upgraded to Buy from Neutral at Goldman.
• Cathay General (NASDAQ: CATY) was upgraded to Buy from Neutral at B. Riley.

When oil lost almost $3 a barrel, stock futures indicated a lower opening for today. Just shy of 5 AM, S&P 500, Down Jones, and Nasdaq 100 futures were all off 0.9%. The drop in oil to $64 a barrel has called into question any projections of a quick economic recovery -- as if high unemployment weren't enough. The Monday after any long weekend is hard, and this one's going to hurt.

The direction in which futures are pointing continues Thursday's equity declines in the United States, bringing the S&P 500 its third consecutive weekly loss. For the day, it lost 2.91%. The Dow Jones Industrial Average lost 2.63% of its value, with the Nasdaq Composite Index giving up 2.67%. Year-to-date, the DJIA is down 5.6%, the S&P 500 down 0.8%.

"One of the 'super five' integrated oil and gas companies, Royal Dutch Shell (NYSE: RDS.A) has a diversified portfolio of oil and gas assets around the globe," says international investing expert Nick Lanyi.

In High Yield International, he says, "As one of the more conservative plays on a falling dollar and a rebound in oil & gas prices, I am adding Royal Dutch Shell -- yielding of 5.8% -- to our 'Reliable Income' portfolio."

"The Amsterdam-based company's revenue is more gas-oriented than its other super-major peers; about 40% of production is natural gas.

"In addition, Shell is more focused on unconventional sources of oil and gas than most -- the company plans to derive more than 10% of its revenue from sources such as oil sands and liquefied natural gas by 2014. This coincides with Shell's long-standing reputation as an industry leader in technology and engineering.

Exxon Mobil (NYSE: XOM) closed at $77.57. Crude oil futures are recently down 5.88% to $38.43 according to Bloomberg. The WSJ says: "XOM is poised to grow even bigger by acquiring a rival energy company or entering a partnership with an oil-rich nation in need of capital." February option implied volatility of 47 is above its 26-week average of 36, according to Track Data, suggesting larger price fluctuations.

Royal Dutch Shell (NYSE: RDS.A) closed at $53.98. The WSJ says one of the many scenarios suggested by observers is XOM buying RDS.A. RDS.A overall option implied volatility of 41 is near its 26-week average according to Track Data, suggesting non-directional fluctuations.

Amex Energy Select - XLE closed at $48.64. XLE February option implied volatility of 55 is above its 26-week average of 48, according to Track Data, suggesting larger price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Analyst upgrades:

• PepsiCo (NYSE: PEP) was upgraded to Buy from Hold at Deutsche Bank.
• Fortress (NYSE: FIG) was upgraded at Citigroup to Hold from Sell.
• Prudential (NYSE: PUK) was lifted to Overweight from Neutral at JP Morgan.
• Keefe Bruyette upgraded Franklin Resources (NYSE: BEN) to Outperform from Market Perform and added shares to their Best Ideas List on valuation as they see an attractive risk/reward at current levels.
• UBS upgraded ASML Holding (NASDAQ: ASML) to Buy from Neutral on valuation as they believe the company remains a market leader.
• Oppenheimer raised Seattle Genetics (NASDAQ: SGEN) to Outperform from Perform on valuation following the recent weakness as they expect positive clinical news flow beginning in December.

Analyst downgrades:

• UBS downgraded U.S. Steel (NYSE: X) to Sell from Buy and lowered its target to $30 from $60 citing deteriorating U.S. conditions and concerns about the company's high fixed costs in a falling steel price environment.
• Royal Dutch Shell (NYSE: RDS.A) was downgraded to Underperform from Neutral at Credit Suisse.
  
• China Unicom (NYSE: CHU) was lowered to Underweight from Neutral at JP Morgan.

While other earnings may have disappointed last week, the news was good for oil giant ConocoPhilips (NYSE: COP). In what some took as a good sign for big oil, the Houston-based company reported that third quarter net income surged 41% year over year to $3.39 per share, and that revenue also surged 52% to $70 billion. We'll see whether the good news extends to other petroleum giants scheduled to report quarterly results this week.

Analysts surveyed by Thomson Financial are looking for BP (NYSE: BP) profits to have grown 43.2% in the most recent quarter to $2.34 per share on revenue of $109.7 billion, and Chevron Corp. (NYSE: CVX) to post earnings up 39.4% to $3.25 per share on revenue of $86.8 billion. Marathon Oil Corp. (NYSE: MRO), ExxonMobil Corp. (NYSE: XOM), and Royal Dutch Shell (NYSE: RDS.A) likewise are expected to report higher net income of $2.33 per share (sales of $23.4 billion), $2.40 per share (sales of $131.4 billion), and $2.65 per share, respectively. Even Valero Energy Corp. (NYSE: VLO) is expected to post earnings slightly higher to $1.46 per share (sales of $36.4 billion), despite the effects of Hurricane Ike. Among these companies, only BP and Valero beat earnings expectations in the previous quarter. Not surprisingly, analysts on average recommend buying all except Valero, and shares of all of these companies have recently hit 52-week lows.

Beyond the torment it has already caused in the Carribbean and the stress it places on those who are evacuating the Gulf Coast, hurricane Gustav will lead to higher prices at the pumps. That's because the majority of the Gulf of Mexico's oil production is shut down in anticipation of Gustav's force.

Exactly how much production is being shut down? CNNMoney reports that "energy producers have shut in approximately 77% of oil output and 37% of natural gas production in the Gulf of Mexico." This is affecting three producers particularly hard -- Royal Dutch Shell PLC (NYSE: RDS.A), BP PLC (NYSE: BP) and Chevron Corp. (NYSE: CVX).

And the production shut-down is significant -- "nearly 1 million barrels of daily oil production is now shut down. The last time this happened was in November 2005, after Hurricanes Katrina and Rita. In addition, 2.75 billion cubic feet of daily natural gas production is now shut down" according to CNNMoney.

Oil rose over $137 Monday after traders calculated that Saudi Arabia's announced production increase will not be able to replace production disruptions in Nigeria, Bloomberg News reported.

Oil rose $2.20 to $137.56 per barrel in Monday mid-day trading. The other major energy commodities also rose on the news. Heating oil jumped 8 cents to $3.85 per gallon, unleaded gasoline gained about 4 cents to $3.47 per gallon, and natural gas climbed about 23 cents to $13.22 per million BTUs.

Attacks on a Royal Dutch Shell (NYSE: RDS.A) platform and a Chevron (NYSE: CVX) pipeline last week halted production of 300,000 barrels of oil per day from Nigeria, Bloomberg News reported. The Nigerian unrest easily offset Saudi Arabia's announcement, at the Jeddah summit it hosted, that it would pump an additional 200,000 barrels per day.

Oil's 'safety cushion' is low

Jim Dietz, independent energy trader, told BloggingStocks Monday, a weak dollar and speculator long positions have been factors in oil's more than 4-year bull market, but the No. 1 factor, in his interpretation, is the low 'safety cushion' between daily global oil supply and demand.

Oil surged $4.27 to $136.20 per barrel Friday after the dollar fell and reports confirmed that Israel had conducted a military exercise that analysts say rehearsed a potential bombing attack on nuclear targets in Iran, Bloomberg News reported Friday.

The other major energy commodities also surged Friday on the news. Heating oil jumped 11 cents to $3.82 per gallon, unleaded gasoline gained 8 cents to $3.43 per gallon, and natural gas climbed 26 cents to $13.12 per million BTUs.

Short-circuited oil sell-off

Under most circumstances, oil rises when the dollar falls, as holders of oil, which is priced in dollars, raise their prices to compensate for the reduced purchasing power of the dollar. The dollar Friday was set to record 3-cent weekly declines against the euro and British pound.

Further, geopolitical events re-entered the oil stage. Israel undertook a major military exercise earlier this month that American officials say appeared to be a rehearsal for a potential bombing attack on Iran's nuclear facilities, The New York Times reported Friday.

Royal Dutch Shell (NYSE: RDS.A) closed at $85.07 Tuesday. Crude futures are down 1.88% to $126.43 according to Bloomberg.

RDS overall option implied volatility of 27 is near its 26-week average of 25 according to Track Data, suggesting non-directional fluctuations.

Alpha Natural (NYSE: ANR), an Appalachian coal producer with a market cap of $5.11 billion, closed at $72.73 Tuesday. Davenport & Company raised its rating to Buy with an $85 target price on May 27.

ANR overall option implied volatility of 65 is above its 26-week average of 58, suggesting larger price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

MAJOR PAPERS:

• The Wall Street Journal reported that a spokesperson for New Corporation (NYSE: NWS) said the company has dropped out of the bidding for Tribune Co's (NYSE: TXA) Newsday. This leaves Cablevision Systems Corporation (NYSE: CVC) as the apparent winner of the auction.
• According to people familiar with the matter, the Wall Street Journal reported that American International Group Inc's (NYSE: AIG) airplane-leasing unit is considering a split from the company. The people said International Lease Finance Corp have grown "increasingly concerned" the company will be hurt by AIG's financial troubles.
• Royal Dutch Shell Plc (NYSE: RDS.A) and Spain's Repsol YPF SA (NYSE: REP) are pulling out of one of Iran's biggest gas projects, the $10B-plus development of phase 13 of South Pars, the world's largest gas field, the Financial Times reported.

WEB SITES:

• Bloomberg reported that HSBC Holdings Plc (NYSE: HBC) set aside a smaller-than-forecast $3.2B for bad loans in the U.S. The bank also said its Q1 profit was higher than Q107.

BBC news reported Saturday that militants in Nigeria have again sabotaged oil transfer infrastructure belonging to Royal Dutch Shell (NYSE: RDS A). This is the fifth incident of such attacks in recent weeks. The BBC report states: "Several previous ones have been blamed on supporters of the militant leader Henry Okah, who is currently awaiting trial on treason charges."

A Shell Oil spokesperson is quoted as stating that multiple oil delivery lines are affected and that some amount of oil has spilled into the environment. The company is undertaking oil containment measures and production volume has been reduced. Reuters News Service reported: "...the rebel Movement for the Emancipation of the Niger Delta (MEND) ... has already knocked 164,000 barrels a day off Shell's production in Nigeria with a pipeline bombing last month."

According to Reuters, local security forces are reporting that not just oil delivery lines have been affected. They claim that three oil wells and other equipment were also subjected to damage. Additionally, this news of sabotage comes on the heels of an eight day Nigerian labor strike against Exxon Mobil Corp. (NYSE: XOM). That strike ended this past Thursday and had temporarily cut that company's Nigerian oil production in half. And of course, with oil supply problems and concerns, oil prices have increased.