Wednesday Wrap

Dow 12,000 Reached. Yippee! Couldn’t hold it for more than an hour though even with oil down over a $1 and friendly CPI. Buy the rumor?

Oil Inventories: Whopping 5.1 MMbo Build, But Products Get Drawn. While crude inventories showed a sizeable build, heating oil and gasoline registered larger draws, not because of increased demand but due to a 3% drop in refinery utilization to 86%. Crude oil inventories in the U.S. now look like this:

As seen in the chart, we’ve gone off the reservation, so anytime refineries want to start back to work, there’ll be plent of oil for inputs.

Oil Closed Down Another $1.26 to $57.67; Stocks Close Modestly Lower. November crude is now resting just above its early October lows, an 8 month low. Despite continued oil weakness and the very real possiblitiy of another near term $5 / barrel retrenchment, the XOI and OIH continue to circle the drain but refuse to flush. See comparison chart

Natural Gas Propelled By Hedgies to 1 Month High. It’s pretty silly to consider that natural gas surged another $0.40 (6%) on the eve of breaking 3.4 Tcf in storage (we’re only 11 Bcf short of that mark now and we’ve got weeks to go in the injection season so 3.5 will happen as well). We’re now up a mind boggling 21% this week. As near as I can tell, traders boosted natural gas on the basis of the large HO pull this morning. Let me make this clear, heating oil inventories were drawn down by a shift to reduced output from refineries for maintenance season, not by cold weather. For proof of this look to heating oil which fell $0.038 today after the giant draw. So there.
– I’m sticking with my projection for an injection of 45-50 Bcf.

–Consensus is 48 Bcf (any # lower than 40 is the only thing that sustains the lunacy).

–See my natural gas storage summary here.

OXY Earnings. Not great but bested estimates by a penny. Top line was swollen by commodity prices but it didn’t filter through to the net income due to escalating operating costs. The stock was bid up 2% through the conference call but faded with the Dow rally to close down a nickel. No play here since I don’t like all the squirelly Chemical unit accounting, but its to note the continued rise in costs is offsetting high prices and now prices are falling. XOM will be the key next week.
Opec Watch: Tomorrow’s The Big Day. Given the weak close on oil the opecies might actually show some resolve and hit us with something bigger than the more than already anticipated, discounted and overly commented upon 1 mm bopd cut. Phil of Phil’s World somewhat cynical suggested that traders deliberately took a dive to prompt a more sizeable cut out of Opec in order to bail out their sizeable long positions. Shame on you Phil, no way, not them.

Wednesday Morning – Tech, Nukes, CPI, Oxy, Oil Inventories

12,000 Here We Come! IBM smashed 3Q numbers, CPI comes in in line at 0.2%, and oil is looking weaker. Hey, there’s no time like the present to take a shot at the big headline number.

OXY beat by a penny at $1.35 eps. while revenue of $4.52 billion easily beat projections of $4.16B. I get pretty cautous when a huge top line beat like that doesn’t filter down to the bottom, a obviously the beat is price driven. Furthermore, 3Q production “growth” looks like it came almost entirely from the Vintage acquisition and the startup of additional production in Libya late last year, with scant gains from core holdings. I’ haven’t seen any guidance yet or a balance sheet but I’ll have more on this later.

Opec Watch: Opec meets tomorrow, but traders responded with a return to skepticism Tuesday. 1) will the ministers agree on allocations for cutting 1 mm bls by Friday?, 2) will the cuts come from quotas (28 mm bls) or production 29.7 mm bls?, 3) will cuts begin Nov 1 or Dec 1?, 4) will Saudi decide to go with earlier statements and shoulder less than half the cut? Iran is on your border, they’re aggressive, they have the 3rd biggest (and growing) military budget in the region, and they don’t like you. Please find the answers to these questions upside down on the back of this page.

Natutral Gas Losing Steam?: Up a whopping 14% Monday, up 4% interday Tuesday but closed flat. Yes, forecasts call for cold weather next week but we’re not looking at a draw for another 3 to 4 weeks, so get over it and sell you greedy traders. By the way, the average change in price for gas between September and December is 18% so we’re pretty much there. Come on T. Boone, surely you can get back on CNBC for a pump before inventories Thursday!

Oil: Inventories will dominate after 10:30 EST. While it’s fun to watch VLO for directionality 5 minutes prior to the report (man that’s uncanny), the last three bearish seeming reports have been met with somewhat delayed rallies so don’t get carried away with the initial reaction. As before, if we get a bullish report (> 2 mm bls draw in heating oil) we’re likely to get a hefty spike. Anything over $61.30 and my puts are off the table and I’m sidelined because they’ll try for $65 (nice round number). Also, a draw in crude would be bad (or good if you’re loaded with XOM calls but I’m 3 to 1 short this morning). Not much chance of a crude draw anyway with refinery utilization still falling but the products should drive oil prices so watch that distillate number. We get a build in HO and you can look for some pretty weak support at $58 and a must hold level of $57.40 on the November contract.

If At First You Don’t Succeed. It looks increasingly like Kim Jong Il, probably the greatest living suffer of Napolean syndrome, is bound and determined to achieve fission, not fizzle. He simply won’t be ignored. On the plus side, I doubt the customary free shipments of heating oil will be steaming his way this winter. Good for inventories, bad for the DPRK’s oppressed. Asian markets are looking pretty week over it as analysts are already forecasting a modest deceleration in fareast GDP.
FYI, El Niño Looks To Be Fading, Possible La Niña Forming. Pacific sea surface temperatures (SSTs) appear to be cooling and even trending towards cooler than normal, possibly yielding La Niña conditions.

–The effects of a La Niña upon U.S. weather from NOAA: La Niña often features drier than normal conditions in the Southwest in late summer through the subsequent winter. Drier than normal conditions also typically occur in the Central Plains in the fall and in the Southeast in the winter. In contrast, the Pacific Northwest is more likely to be wetter than normal in the late fall and early winter with the presence of a well-established La Niña. Additionally, on average La Niña winters are warmer than normal in the Southeast and colder than normal in the Northwest.

–This might be considered a bit of bullish news for fuel consumption as it takes away El Nino’s warmer than normal impact in the Northeast. The fact of the matter is that strong El Ninos and La Nino (those that vary 7 degrees or more from normal in Pacific SSTs) are much more likely to impact US weather than borderline events.

Analyst Watch: pretty quiet, we’ll see what they do with OXY tomorrow.

–From yesterday: BP target price cut at AG Edwards from $88 to $78. Guess he didn’t like the email entered into evidence and written by the 2nd in command of BP bemoaning losing a day’s vacation to tour the Texas refinery blast site where 15 workers died. I’ve got to create a tab just for BP to keep track of how many ways you can muck up a great company. Still can’t believe I haven’t gotten a put position on here, but you know, I keep saying, it can’t get any worse…and then it does.

Holdings Watch: Yesterday, the Goldmann pump from last week started to fade. It wasn’t oil prices falling $1.01 but rather the toppy action in the Dow and a bearish (I guess) producer price index. When the Dow recorvered the majority of its losses, so did the XOI and OIH. What’s promising here (for a guy who has been right on the down trends in the oil and natural gas but less so on the stocks and their linkage to said commodities is that everything went up with the Dow over the past week. Regardless of production growth profile, hedge position, or relative valuation all boats were lifted with the rising tide of the DOW’S MARCH TO 12,000. I find this promising/consoling because:

– It means that you’ve got fast money, now more than ever, in the Energy Sector, bottom fishing for easy profits. Fast money doesn’t know much more than the ticker and the sector. Fast money isn’t loyal. Fast money hates losses. Next week or next month, fast money will abandon energy for Gold or Yen or Japanese ethanol. Oh look, shiny baubble.

– It also means that many energy stocks are now “priced for perfection” going into earings. I put XOM, EOG, HOC, and OMM in this category to name a few. Joy.

– And finally, tt means that a snap back will occur as charts formerly tied to oil or gas realign with those commodities and their current downtrends. Once again XOM and LNG, SU, and ECA.