Thursday Wrap – Lashed by the Storm

That hurt. Everything went up…. XOI UP 1.94%, XNG UP 1.66%, OIH UP 2.5%. The fix was in early as most stocks erased the prior day’s losses with their opening trades, then drifted higher all day long. The energy indexes were caught up in a rubber band rally with DOW which ended UP 0.8% on its quest to break 12,000, and all of them closed at their HOD. Can we just get the Dow up another 53 points tomorrow so we can then sell off the headline DOW 12,000?

After waffling all day and being down just prior to the NYMEX close, even crude managed a last 5 minute rally to end the day up $0.80, to $58.39.

…Everything but natural gas prices. As predicted, natural gas fell through $6/mcf to land at $5.77 (down $0.38) when we got our 62 bcf injection which was in line with expectations. In comments this morning I had wanted a test of $6 before inventory (got that) and then a test of $5.76 (got that as well with a low of $5.74). The selloff made no difference as all gas stocks closed up at least 1%, many of the larger ones up 2+% (and BBG up a whopping 6%).
Position Wrap: No, I won’t even bother to run through positions given the willy-nilly carnage this rally has wrought. My October puts aren’t worth selling at this point but I remain confident in my November positions. ECA underperformed, if you can call it that, by only going up a dime which is little consolatiion on a day in which most of my picks rallied a minimum of 2%, despite a 6% drop in November gas and a 3.5% drop in the 12 month strip.

Commenting on oil today : “The IEA just cut their 2007 forecasted demand for crude by 200,000 barrels per day and Saudi Arabia doesn’t seem to want to participate in a production cut with OPEC,” said First Enercast’s Smith. Added to that, Smith said he believes “the downturn in crude prices may result in an exaggerated move due to the significant increase in fund participation in the energy markets,” he said, noting that “major funds are attempting to hedge or exit their enormous long positions in crude.” – no kidding.

Odds & Ends:

– Norway shut in about 200,000 bopd (Norway produces about 2.7 ish mm bopd), possibly until mid to late November over safety concerns at several platforms. Apparently, the auto-drop emergency boats have weak roofs that need strengthening so the crews have been ordered off 2 key platforms. At least in Norway, no one comes aboard the rig, holds you at gunpoint, and demands cash.

– The Gas Storage tab will be updated tonight. No change in my 3.6 Tcf season end storage projection.

Thursday Morning – The Calm Before The Storm

Natural Gas: This is it. Call Guinness. The headlines Friday from every newspaper, magazine, and obscure energy blog will trumpet “Natural Gas Inventories Reach Record Levels”.

– to be clear I’m expecting an injection of 65-70 Bcf for the week ended October 6, 2006.

–I believe consensus is 67 Bcf.

–the 5 year average injection for this week is 65 Bcf (what a coincidence we’re all so close).

–anything less than 60 could prompt a re-rally as traders try to spin themselves into believing they’ve been right for the last week and a half. Notice their confidence waned yesterday.

– I’m also looking for natural gas to retest $6 early, before inventories, with a critical move through $5.76 if inventories come in above 60 bcf. Less than that and gas will move closer with oil and heating oil today. More than 70 bcf and there won’t be enough room in the door frame for the crush of traders getting out.

–But who knows, it’s just a survey, a sampling, not a tally.

–We’ll certainly exceed the old record in the Producing region (668) and we’re already there in the West. The east will be very close to a record as well but if not this week, then next for sure.

–speaking of next week, based on a preliminary read on weather and barring a sudden bought of demand creation I calling for injections of 45-50 Bcf. That gets us half way through October and leaving us with 2 to 3 weeks of continued injetions. See the chart on the gas storage tab for my pretty “back of the envelope” math on how we reach 3.6 Tcf by month end.
Remember, oil inventories are out at the same time today so it’s going to be confusing for several minutes: oil expectations range from a build of 1.9 mm barrels to draw of 1.7 mm bls (Fimat who are usually pretty good). Anything less than a build in oil and in heating oil could set off a nice rally. Well, not so nice for my puts but I have to be honest.

Stocks that should get hit hard (1 to 3%) by a move back into the mid to upper $5s on gas include: APC, BBG, ECA, EOG (requires negative, not just flat oil or they won’t care), ECA, KWK, SWN and of course the whole group if gas slides to $5.50. SU should make further headway back towards my near term target of $60 today (maybe dn another $2) if oil stays in the $57-$58 level.
Analyst Watch:

–Bear Stearns ups TSO to peer perform. Not a bad call given the stabilizaiton and rebound in crack spreads. Plus, it’s not much of a limb to go out and say, “ok, I’m not telling you to buy this stock, just hold it if you already own it.”

–Prudential ups CHK to overweight saying its a great company (I really couldn’t agree more) and that the recent pullback makes for a good entry point. OK, wait a minute. When did Prudential go to neutral on CHK. Oh yea, August 19, 2003. So our boy at Pru missed the ride from $10 to $40, the stock slides slow to $29 over the last 12 months and he says now its a buy. Now, he establishes a $38 price target. Now, with energy prices having put in a pretty good peak, and starting to really falter? Now, when drilling activitiy is at a peak? (and CHK strategy relies on being a very active driller, and when). Nice gamble guy, I guess it’s only OPM. Actually, I hope he pops it at the open because guys like me will be there around inventory time to pick up cheap puts if prices go south. Pru is not Goldman.

–FBR just cut their price target on CHK from $44 to $41, stays at outperform, which, with the stock at $29 I guess you have to. Man, they should have talked to Pru first. This is more of the “marking to market” for 3Q and 4Q oil and gas prices that’s going on quietly. Sshhhh, don’t tell anyone. The level of apathy in the face of fundamentally bearish commodity prices (that’s the stuff these E&P guys sell) is saddening.

–JP Morgan cuts TOPT from neutral to underweight. Looks like someone expects less oil traversing the seas. Wow is this call late. IPO at $11 in July 2004, peaks at $22 and slides to $5.70 and now you say sell. Ouch. Not that I disagree with the pesimistic call on tankers. I just might take a harder look at OMM or TNP, both of which I’m happy to say has options, and are near their all time highs. Or FRO, whose chart still looks like it’s teetering to me. I’m not advocating a trade, yet, but will do more homework over the weekend. Maybe these high-flyers are insulated from a slow down in shipping oil? We’ll see.

Well that’s enough for the morning, time to make some coffee and do some reading.