Finally Friday 1/5/07 – Round 2 Goes To The Bears

The New Year Has Not Been Kind To Commodities or Energy Stocks. Suddenly stocks are waking up to the facts that: 1) natural gas was off 40+% and oil was all but flat last year, 2) oil and gas inventories are high, and 3) that the energy stocks that sell these commodities for which there is currently less demand are seeing their earnings estimates begin to tumble. If only someone had told the bulls that a little earlier so we wouldn’t have had to suffer through the non-sensical (but very painful) rally of October and November! Wow, Lehman even downgraded XOM this morning!

Oil Bulls Got More Bad News In The Form of Rising Products Inventories:

• Crude inventories fell 1.3 mm bls for the week, well off the pace seen in the prior two weeks which labored under a fog shuttered Houston Ship Channel. Though still a decline, the draw in crude was spun positively on CNBC by a guest oil expert. Not to belabor a point but his firm had called for surprisingly low crude draws in the prior two weeks and was looking for a build this week. Let’s just say that I think his motives are suspect. The “bullish” crude draw was quickly overshadowed by…

• …Much larger than expected builds in both gasoline (5.6 mm bls) and distillates (2 mm bls-double expectations). CNBC’s guest shrugged this off as a lack of winter weather. Fine. In that case I’ll shrug off the two previous large crude draws he said had shown that the market is coming back into equilibrium as nothing more than a logistical glitch. And wait a minute…warm weather reduces gasoline demand? I don’t see that.

Note how quickly gasoline and heating oil inventories have pulled back to above average levels for this time of year. You can say it’s the weather but then there’s that pesky gasoline chart. Hmmm. Could it be that since the refiners decided to go back to work we’re catching up? I wonder.

• Refinery Utilization had been low for an unusually long “maintenance season” but is now at 91% and rising. Margins are down and surprise, COP warned that margins are well below third quarter levels.

Oil Got Popped Again…Oil was off $1.50 before inventories but settled down $2.73 (for the second consecutive day) to $55.59. $55 is the obvious next test and although I really expect Opec to make a statement very soon so far they have been quiet. Maybe rebels or somebody else can help the bulls because it gets kind of hard to find support at this point. In fact, the February contract hasn’t had a weekly close below $55 since June 2005! Crude reversed slight gains overnight and is trading down to $55.25 this morning.

… And The Stocks Took It In The Shorts. The XOI, XNG, and OIH all made good progress toward the levels I wrote about yesterday morning.

• XOI fell 1.9% to 1,128 and is now resting just below its 200 dma. Any move to the downside could result in an 1,100 test at which point, you could see a 80 point freefall to the September lows. This fall would seem to make sense when you recall that oil was nearly $10 per barrel higher in September than it is now.

• XNG fell 1% but natural gas was flat on the day. At 427 the index has to fall to 390 to reach it’s late September lows. Gas is hovering just above $6 now but in late September, natural gas traded at $7.70, once again auguring for lower levels on the index, especially in light of the downward direction I believe gas is headed in.

• Oil Service Got Slapped Again. The OIH fell another 2.5% to end the day at 130 but looks at a minimum to be headed back to its September lows of around 120. Below that and you’re into the fall of 2005 before you find any solid technical support. Quite simply, if commodity prices continue to decline, oil and gas companies will not be able to pay for oil services (less fraccing, less mud, less drill bits, less drilling etc) at present pricing let alone suffer the increases that they have been for the last four years.

Note To Readers. I realize that I’m talking about technical levels of support a lot recently but that’s because of the nature of a good portion of the dollars invested in the energy complex. There is an awful lot of funny or go-go momentum money in the group right now and those people rely primarily on charts. They don’t care so much about the company as about the stock. I feel it’s a pretty important distinction. Anyway, they act as a herd and when a group tires they move on. Fast. I think Art Hogan, market strategist at Jefferies and Co., summed it up best by saying, “It looks like technology is going to be the leader of this market in the first quarter. Even as energy is falling, money is going straight out of there and going into techs.”

Odds and Ends:

What Did T. Boone Pickens Last Say About The Price Of Oil? According to T Boone oil will average $70 per barrel in 2007. Did CNBC lose his phone number? Or is he a bear now but still accumulating his short position? He can just say he would have been right but he didn’t buy into the whole global warming thing. By the way, the Brits said yesterday that 2007 is likely to be the warmest year on record due to El Nino combined with global warming. Maybe Opec should see if they can convert some of their oil to sunscreen. Don’t get me wrong. T Boone is a legend and great philanthropist.

But How Much Does He Really Think Oil Is Worth? His company XCO just bought an asset package from APC last week paying the equivalent of just under $15 / barrel on a proved reserves basis. Yes they’re still in the ground but theirs also the probables which were probably sizable and the rest of the untouched acreage. Hmmmm. It’s always easier to drill for oil on Wall Street but how big of a spread does he think there should be? In fact, according to a writer at the Washington Post, Bloomberg ran a story (which I admit I haven’t found) about how Picken’s hedge fund made money shorting oil in the fourth quarter after repeatedly going on CNBC and touting higher oil prices (which I vividly remember).

Gas Inventory Day: Gas Withdrawal Should Be Up Slightly Over Prior Week But We’ll End The Year With Over 3.0 Tcf In Storage- A Record. Last week saw 165 heating degree days recorded vs 156 in the prior week. The distribution looks a little better for gas consumption. I’m guesstimating 70 Bcf and I haven’t seen a consensus number yet. Honestly, gas should be toast unless the number is just absurdly large.

• We’d have to have a withdrawal of 132 Bcf (which is NOT going to happen- not even close) to save you from the headline. “Gas In Storage Ends Year At ALL Time Record Level”. We’ll probably get something between 60-100 which doesn’t even get you below 3 TCF.

• Gas has been coasting for a few days now but should angle to the downside next week (or today if we get a number below 50).

• This week’s HDD number for next week’s withdrawal falls back to 157. This mild weather is simply not supportive of gas over $6 in January.

Analyst Watch: Lehman cuts XOM from Buy to Hold over slowing production growth. Prudential cut EOG and CHK to neutral while UBS raised EOG to neutral.

SU Had A Strong December. 281,000 bopd oil sand production, up from 257,000 in November. This brings their 2006 average to nearly 260,000 bopd which is at the high end of their stated range. The company also said to expect average oil sands production of 260-270,000 bopd for 2007, in line with prior thinking. After the beating this stock has taken it will be interesting to see if a piece of unexpectedly good production information can rule of the pall of lower oil prices.

Thanks for reading everyone! I’ll be around all day but as always, have a great weekend. I’ll be adding a valuation table tab this weekend so when I say something looks cheap or expensive to me relative to its group or to its own history you’ll see what I mean graphically.