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.

Royal Dutch Shell (NYSE: RDS.A) closed at $76.39. Crude futures are up 0.45% to $117.21, according to Bloomberg. RDS over all option implied volatility of 23 is near its 26-week average of 25 according to Track Data, suggesting non-directional fluctuations.

The Volatility Index for S&P 500 Options (VIX) is at 20.12; the 10-day moving average is 22.06.

Financial Select Sector (XLF) overall volatility is at 33; the 26-week average is 35.

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

MOST NOTEWORTHY: Auto & Truck Suppliers, Oplink Comm and The Wet Seal were today's noteworthy upgrades:

• Baird upgraded the Auto & Truck Suppliers sector to Market Overweight from Market Weight citing valuations, lowered expectations, industry dynamics and a potential bottom in economic indicators. The firm upgraded Accuride Corp (NYSE: ACW) and Magna International (MGA) to Outperform from Neutral.
  
• Merriman upgraded shares of Oplink Comm (NASDAQ: OPLK) to Neutral from Sell on valuation, as they believe Friday's sell-off fully reflects near-term operating concerns and that share price downside from here is limited.
  
• Cowen raised The Wet Seal (NASDAQ: WTSLA) to Outperform from Neutral and has increased confidence that the new management's operational changes and cost cutting initiatives will lead to EPS upside.

OTHER UPGRADES:

• BT Group (NYSE: BT) was raised to Equal Weight from Underweight at Morgan Stanley.
  
• Societe Generale raised Royal Dutch Shell (NYSE: RDS.A) to Buy from Hold and ENI SpA (NYSE: E) to Hold from Sell.
  
• Goldman raised Embarq (NYSE: EQ) to Neutral from Sell.

MAJOR PAPERS:

• According to people familiar with the situation, the Wall Street Journal reported that Hurray! Holding Co Ltd (NASDAQ: HRAY) and Enlight Media have agreed to a merger valued at about $160M, that could be announced as early as Monday afternoon.
• The Financial Times reported that anti-corruption investigators are probing payments by Chevron Corporation's (NYSE: CVX) ChevronTexaco and Royal Dutch Shell PLC (NYSE: RDS.A) to a company owned by powerful Nigerian politician James Ibori, whom they suspect has laundered tens of millions of dollars in British banks, cars and property.
• The Financial Times also reported that Vodafone Group Plc (NYSE: VOD) is looking to increase its presence in China through a government-led restructuring of the country's telecommunications industry.
• According to Barron's "The Trader," there is speculation that the decline in the shares of Echostar Communications Corporation (NASDAQ: DISH) last week has reinvigorated AT&T Inc's (NYSE: T) interest in buying the company.

OTHER PAPERS:

• Citigroup Incorporated (NYSE: C) is said to have "informally" approached The Royal Bank of Scotland Group Plc's (NYSE: RBS) CEO, Sir Fred Goodwin, the Telegraph reported.

MAJOR PAPERS:

• Royal Dutch Shell Plc's (NYSE: RDS.A) 16.67% stake in the Cossack Pioneer field of Australia's North West Shelf may be up for sale, according to the Wall Street Journal. The sale price is expected to be about $450M and may attract the likes of Cnooc Ltd (NYSE: CEO).
• According to the Wall Street Journal's "Heard on the Street," subprime woes continue, and UBS AG (NYSE: UBS) may face a $7B-plus write-down in the fourth quarter and Citigroup Incorporated (NYSE: C) could face between $8B and $11B of write downs in the fourth quarter.
• According to Barron's Online's "Weekday Trader" column, a General Electric Company (NYSE: GE) Asset Management bond fund, worth $5B, is suffering losses in its asset-backed mortgages and asset-backed securities, and is giving its investors the opportunity to redeem their holdings at 96c on the dollar.

OTHER PAPERS:

• The Financial Times reported that JP Morgan Chase & Co (NYSE: JPM) launched a micro-finance unit as part of its emerging markets strategy.

WEB SITES:

• According to executives familiar with the situation and reported by Apple Insider, the launch of the Apple Inc (NASDAQ: AAPL) iPhone in China is likely to be delayed due to a number of issues including revenue sharing and SIM card incompatibility.

MOST NOTEWORTHY: Royal Dutch Shell, Citigroup, American Financial and Cognos were today's noteworthy downgrades:

• Credit Suisse downgraded shares of Royal Dutch Shell (NYSE: RDS.A) to Neutral from Outperform based on valuation as analyst estimates now look about right, removing a potential catalyst.
  
• Banc of America downgraded shares of Citigroup (NYSE: C) to Neutral from Buy and lowered their target to $39 from $45 given the eroding confidence in the company's earnings and book value.
  
• American Financial (NYSE: AFR) was downgraded to Neutral from Buy at UBS and to Market Perform from Outperform at Friedman Billings following its acquisition by Gramercy Capital Corp (NYSE: GKK).
  
• CIBC downgraded Cognos (NASDAQ: COGN) to Sector Performer from Outperformer based on takeover valuation premium and FX headwinds.

OTHER DOWNGRADES:

• Goldman removed Microsoft (NASDAQ: MSFT) from its Conviction Buy List.
  
• Merrill downgraded AMBAC Financial (NYSE: ABK) to Neutral from Buy.
  
• Morgan Stanley downgraded the hardlines and softlines retail sectors to Cautious from In Line; the firm also downgraded Bed Bath & Beyond (NASDAQ: BBBY) to Equal Weight from Overweight and Nordstrom (NYSE: JWN) to Underweight from Equal Weight.

MOST NOTEWORTHY: Centene, Brinker International, Harmonic, Idex and Royal Dutch Shell were today's noteworthy upgrades:

• Jefferies upgraded shares of Centene Corporation (NYSE: CNC) to Buy from Hold as they expect the company is benefiting from above 20% revenue growth next year and SG&A leverage opportunity over the next 12–18 months.
  
• Bear Stearns upgraded shares of Brinker International (NYSE: EAT) to Outperform from Peer Perform as they believe Brinker's turnaround efforts can enhance shareholder value.
  
• Friedman Billings raised shares of Harmonic (NASDAQ: HLIT) to Outperform from Market Perform based on the favorable outlook for cable and satellite spending on HD video and other projects.
  
• The firm also upgraded Idex Corporation (NYSE: IEX) to Outperform from Market Perform, citing the company's positive 2008 outlook and solid end markets.
  
• Goldman upgraded Royal Dutch Shell (NYSE: RDS.A) to Neutral from Sell on valuation.

OTHER UPGRADES:

• CIBC upgraded J. Crew Group (NYSE: JCG) to Sector Outperformer from Sector Performer and Parker Hannifin (NYSE: PH) to Sector Performer from Sector Underperformer.
  
• Sprint Nextel Corporation (NYSE: S) was upgraded to Outperform from Neutral at Credit Suisse.
  
• RBC Capital Markets upgraded LaSalle Hotel Properties (NYSE: LHO) to Top Pick from Outperform.

MAJOR PAPERS:

• Barron's Online's (subscription required) "Weekday Trader" called Nucor Corporation (NYSE: NUE), a low-cost steel producer with a 4.7% dividend, a stock worthy of consideration.
• Royal Dutch Shell (NYSE: RDS.A) and PetroChina Company Limited (NYSE: PTR) have signed a provisional agreement for Shell to sell liquefied natural gas to PetroChina, reported the Wall Street Journal (subscription required).
  
• The Financial Times (subscription required) reported that Renaissance Technologies and DE Shaw, two of the biggest quantitative hedge fund managers, are raising money, despite concerns over the poor performance of many computer-driven funds last month.

OTHER PAPERS:

• According to the New York Times, Ventana Medical Systems Inc (NASDAQ: VMSI), which makes cancer diagnostic equipment, is expected to announce today that it will acquire Spring Bioscience for $28.9M in cash.
• The New York Post reported that General Electric Company (NYSE: GE) CEO Jeffrey Immelt is planning on bringing Beth Comstock back as GE's chief marketing officer, according to sources close to Immelt.