Oct 2 Oil Inventory Consensus – More Product Builds Seen

Oil Projections from Reuters:

• Distillate up 1.3 mm bls (bet this is a touch higher given high refinery run rates, low demand).

• gasoline up 900,000 bls (this was an add of 6.3 mmbls last Wednesday so anything goes here, could be a draw)

• crude stocks down 700,000 bls – ???

The U.S. Energy Department said on Monday it would delay buying some 11 million barrels of replacement crude oil for the nation’s emergency petroleum stockpile through the winter heating season to keep more supplies on the market. (that’s 122,000 bopd or 855,500 bbls per week, not too shabby, not too good for crack spreads, not bad at all for rove- just kidding, not buying the rampant conspiracy theory going on here…although the correlation between gas prices and presidential approval ratings is astonishing and if anyone could pull it off…nevermind, again just kidding)

Foley’s Follies – Bad For HAL?

Florida’s rep Mark Foley is history. Note to self: explicit and lude emails and IMs to underage pages (of either gender) is a career ender. Other Republicans are busy distancing themselves from Foley while democrats are calling for Hastert and others to stepdown. Big surprise on both fronts. If there is one big juicy target the Dems would like to get their hands, its HAL, then Cheney etc… , but only HAL can I short. If the democrats successfully pin knowledge of Foley’s messages on other House members then you have a whole new ballgame with the very real possibility of democrat controlled House who will then be able to drag HAL in for questioning. Notice that HAL is quickly trying to purge itself of its more troublesome subsidiary KBR? Probably too little too late but I’ll be out before election night because its just too close to call. I expect the big move down to take place in October if polls start tipping away from the GOP.

Positions – Temporary Format

Until I work out how to post a spreadsheet I’ll periodically post positions in the alpha (long) and omega (short) portfolios.  This will get more detailed with exact positions, timing, g/l etc when the spreadsheet is up.

alpha: 0 positions

omega: puts on XOM, PTEN, ECA, EOG, VLO, HAL, SWN, and WY . All are at or near money and October expiration save PTEN which is Nov.

XOM vs XOI

As I mentioned earlier, XOM has performed remarkably well in the face of steady declines in crude oil and natural gas prices. Although energy related funds are not prone to run to cash during times of falling commodity and stock prices, they do shift their allocations to what are perceived to be safer bets. Safer generally equates to bigger, highly profitable, lower volatilty stocks.

The link below shows the correlation between XOM and the XOI – amex oil index – of which XOM is a part along with 11 other large cap energy companies. In mid August, XOM began to outperform the index which roughly corresponds to peak oil this year. Energy focused funds began to narrow their energy weightings taking money out of riskier stocks in the energy complex including several in the XOI and transferring a good bit of those dollars into XOM. Since mid Aug. 15th, XOI and XOM are down 9% and 2% respectively, while Nov oil and gas have fallen 18% and 35% respectively. These divergences do not last. However, while I’m still in my Xom puts and have faith that it will fall, some day, it’s impossible to determine when XOM will capitulate (if ever). My sense is that a better way to play an expected drop in oil is to go after the large cap independents like an APA or DVN or , for those of you with a quick trigger finger, SU.

http://finance.yahoo.com/charts#chart2:symbol=^xoi;range=1y;compare=xom;charttype=line;crosshair=on;logscale=on;source=

More Opec Warnings – But We All Care Just A Little Less

Opecie warnings are growing tiresome but also growing less effective (as seen in today’s oil price action), at least from the guys with little to no street cred. Tone will probably change if we move back below $60 so my thinking is that that won’t happen until next week but there’s always hope.

Oil may get a bounce Wednesday when the numbers will almost certainly be less bearish. Big inventory numbers, one way or the other, usually are followed by a partial reversal – so the large gasoline build last week may be followed by a draw this week. I doubt it will be draw, given the time of year, but it will certainly be a smaller build than last week. Also, look for distillate to build again but not as much,probably around 2-2.5 mmbls. If the group gets a good bounce I’ll be buying more puts because while the fundamentals are very bearish this will lessen OPEC’s near term worries, allowing oil to drift lower after an initial pop.

XOM is very silly up here given that they produce more and oil and gas than they can possible hedge yet the stock is off 5% from recent highs while oil and gas are down over 20% each and the out months have been severely damaged. It’s being propped up because it’s viewed as a safe harbor for investors wanting energy exposure in increasingly uncertain times. That won’t last but we may have to get into earnings season for the group with begins after October 20 before this pattern reverses.