Monday Wrap

Without Opec To Talk It Up, Oil Takes Another Dive: December crude dove at the open and closed down $0.48 to $58.85, a new 10 month low. USO fell $0.49 (about 1%) to close at another record low of $52.27.

Natural Gas Rally Faltering: Gas attempted to carry forward with last week’s mongo super rally but quickly failed. I’ve switched to watching the December contract as we’re only 4 days out from November expiration and things often get a little whacky in the last week before contract expiry.

–December gas closed down $0.37 at $7.77 as traders begin to look beyond this week’s unseasonably cold weather (expected 106 HDDs are 15% colder than normal and up from 81 in the past week).

–Changing thoughts to 35-40 Bcf injection this week (from 45-50 espoused in last post) and,

– If this week’s forecast holds, estimate 30-35 injection for next Thursday. See updated gas chart (link) showing peak storage now expected to be 3,560, still within the bounds of my previous forecast of a 3550-3,600 Bcf peak.

–This 6-10 day graph shows country-wide warming (red=warm) so a third injection is very likely at this point.

Tanker Rates Weaken. Physical tanker freight rates for Very Large Crude Carriers (VLCCs) working the benchmark Middle East-Japan (TD3) route settled at W85 on the Baltic Exchange on Thursday, the lowest level in more than six months, and were talked at W75 on Friday. Freight rates for VLCCs on the TD3 route have already fallen by about 34% since September 21, and are about 12% below year-ago levels – from the Gulf Times. While tanker rates haven’t broken down, the trend is negative.

HAL Conference Call Comment: “No sign of driling slow down. Any slow down would be short lived”. Sounds similar to what the home builders said when asked a year ago about a housing bubble, “Bubble? The only bubbles we see are in our champagne glasses”. After a strong open, hal gave back all of its gains before a late day rally in crude dragged the group higher.

Articles like this irritate me: Stay the course with energy holdings.

–The author says to stay in your energy stocks while explaining that the high crude inventories in this coutry (and I assume he knows they are high elsewhere) are due to seasonal factors and nothing more.

Yes, inventories are at highs not seen since 1998 but who cares, we’ll burn off that surplus while oil prices remain high?!

This is not a seasonal bump that’s gotten a little bit out of hand. This is greed. Greed on the part of Opec who continued to pump too much oil for far too long. They got used it to it and now they need it to stay high to support giant ego advancing projects and in some cases growing militaries and extremism. Furthermore, there is no reason why the high cost of extracting oil from tar sands should justify the overall high price of WTI. That’s why a barrel of oil in Texas is not a barrel of oil in Canada or Dubai. That’s why there is such a thing as a differential from place to place to place.

–In 1998, the same “supply always short of demand” fundamentals existed. Heck, we’re always about 30 to 50 years from running out of the stuff.

–In 1998, we hit inventory levels just about as high as these.

–And in 1998, WTI was $12 per barrel while the heavy oil out in California was $8.

–And it was a dark time to have owned the energy stocks

–Note that the author normally writes about insider transactions, not energy. He made two picks DVN and DWSN (a land based seismic firm), both of which he already owns. So he looks to be out of his league and fairly biased.

–He notes that we could dip into the lower 50s on oil or even into the 40s yet he doesn’t have an upside target for oil. So why should I BUY these stocks if the main thing they sell may take another leg down? Why not sell now and buy lower? Hmmmm.

Monday Morning

Opec Watch: They came, they saw, they cut. And oil traders didn’t buy it. As I have written repeatedly in the last 2 weeks since the rumor of meeting surface it was “buy the rumor, sell the news.” Opec’s credibility has been shot by acting like a hydra while attempting to convey the mixed message of the need for oil to be priced at levels more than double those three years ago while the cartel is increasing surplus production capacity (link).

Putting My Money Where Typing Is: Targets For November. My Bias remains Negative for oil and gas prices and the XOI, XNG, and OIH. Targets are pretty stupid in a vacuum. New data comes in and I re-evaluate my bias. At present I remain negative on the commodities (and therefore select companies that either sell them or sell services to those guys). The negative bias on the commodities is almost entirely based on supply demand fundamental but, and to a much lessor extent, technical-analysis plays a part as well. So why not lay out my current thinking for November?

–Crude Oil: Lower. The December contract is holding to a tight range between $59 and $63. If the Iran things blows over like it has the last several times then oil should tumble Tanker loadings  remain high.

–Natural Gas: Much Lower. More on this below but I expect natural gas to fall to $5.25-$5.75 by this time next month from a current ridiculously high $8.10 on the December contract. Watching for the turn in gas and then into puts on APC, BBG, EOG, KWK, and LNG.
–XOI – hinges on the DJIA and not oil. The linkage is dumbfounding until you realize that the go, go market rules XOM (at least until earnings) and that until fund managers see a precipitous drop in the big dog, there won’t be a capitulatory sell off in energy complex.

Current Picks: Puts on XOM (Nov $67.50), HAL (Nov $27.50), FRO ($35), and PTEN (Nov $20) and SU ($65). I paired my gassy stock puts back and am watching closely for a turn in natural gas before re entering puts on APC, BBG, EOG, KWK, LNG, and SWN.
–Priced To Perfection Club: XOM, OMM, SLB (see comments Friday),: these are stocks that have not seen their stock prices suffer and need strong beats on earings.
On Hold: Refiners – crack spread recovery could continue well into winter months, earnings for most are due out next week so I’ll put together a white paper by the weekend.

CFTC Shows Short Covering- new update-link- shows short covering over the last three weeks has been behind recent strength in natural gas prices culminating in a buying frenzy. Natural gas prices advanced an unreal 27% in the last week. This exceeds the percentage record increase for September to December.

Tet In Baghdad. From this weekend’s headlines. We’ve Lost the Battle for Bagdad and Bush: I Won’t Change Strategies In Iraq. If things get further out of control, the situation in Iraq could become more supportive of oil prices than anything else going on right now as the fragile but growing (estimated at 2 mm bopd currently) Iraqi oil supply is threatened.

Holding Watch: HAL beats top and bottom line. At first blush the quarter looks a little strong but I wasn’t looking for a miss so much as an indication that things on both the energy services side and at KBR has seen their best days for now.
Analyst Watch. BBG, SWN, and While I have no opinion on NFX at this time, they did lower production guidance (delays, not misteps) last week so while it bears watching I’ll probably stay away from those guys on the put side.  Jefferies cut its target on NE by 10% and Goldman picked up the weird-energy group (solar, clean coal, etc) with a Neutral rating, which probably will remain that way until spring when all of the sudden, fear of summer heat and high electricity bills will prompt an update.

Non-Opecies Have Don’t Plan To Cooperate. My thanks to Soccer for his summary of non-opec plans which pounds home the point that Opec is less important than they think they are.