zman’s Energy Brain

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Tuesday – Oil Continues To Yo-Yo

Posted by zmann on January 23, 2007

Oil Just Couldn’t Manage To Gain For Two Days In A Row. After a promising opening (for the bulls at least) which saw February crude add another $1.45 onto yesterday’s buck fifty advance to reach an inter-day high of $53.44…the bulls exhaled. Crude fell like the value of the Dinar on payday I assume on scurrilous rumors that there’s a lot of the stuff stockpiled all over the globe right now. When the dust settled, the February contract settled down $0.86 at $51.13. Year to date oil has still not managed to put together two up days in a row. This morning crude is up slightly on more kidnappings in Nigeria but I wouldn’t expect that strength to last long.

We should get another “$50 test” this week. The March crude contract closed yesterday day down $0.82 to $52.58. To be fair if we reach $51.45 on the March contract that’s the same as hitting $50 on the February. However, the psychological impact of breaking $50 won’t actually be as powerful until we break, well, $50. Near term the new contract may also rally to $55 before reversing on further high import/low refiner utilization based builds shown in crude stockpiles tomorrow. Just because it’s cold I don’t expect a mega massive draw on heating oil supplies tomorrow. Maybe next week but not tomorrow.

Opec Watch:

  • Sudan still plans to join Opec but announced yesterday that it will double it’s current production to 1 mm bopd over the next 2-3 years. Opec ministers are probably not too happy about that but the turmoil brought by adding Sudan to the cartel may well be worth it. Sudan makes Nigeria look like a day, albeit an involuntary one, at the beach. Since Sudan is relatively small as oil producers go I wonder what the thinking is on inviting them into the clubhouse? It couldn’t be that even if they cheat it won’t really make a dent but that the chances of them having a full scale civil war/becoming a terrorist state in the next 15 minutes is entirely within the realm of possibility which of course provides oil with additional “instability premium.” Nah, can’t be.
  • Speaking of Nigeria, rebels there took an American and a Brit hostage overnight. The kidnappers demanded $11.7 million for their safe return and this explains this morning’s reversal of overnight losses in crude. For more details click here.

Natural Gas Rallied Late In The Session To Score A 17% Rise In The Last 3 Days! It’s like they woke up and noticed it was cold outside which tells me this rally will be fleeting. Weak resistance is at $7.50 with a much more solid ceiling at $8. Let me just point out that we still have record gas in storage for this time of year and that $8 is absolutely and completely delusional pricing right now. By the way, this sudden rise in gas costs is not good news for SU so if oil continues to drag its feet and gas manages to hold $7 I’ll be looking for that one to head back to test $70.

Retail Natural Gas Prices Are Starting To Fall Even For The Residential Customer. Always slower to decline than the commodity (a lot like gasoline at the pump vs the wholesale price) the reduced price of natural gas is finally starting to reach the consumer. The chart below, courtesy of the EIA, demonstrates that the last bastion of retail strength, the residential component, is now lower than year ago levels. Industrial demand, which accounts for roughly one-third to one-quarter of all consumption depending on the time of the year, is touching on two year lows. So far the natural gas storage withdrawals do not reflect a sudden priced induced “demand creation” response however it may be around the corner. This demand response coupled with reduced supplies from Canada and flat to down LNG shipments could set up a tighter supply/demand balance later this year. Nothing concrete just yet but I’m always looking for things that could prove my “gas is too damn high” thesis wrong. At some point, probably in mid to late 2007, I wouldn’t be surprised to see this tightening of the North American gas market occur.

nat-gas-consumer-price.JPG

Weather Bodes Big But Not Huge Gas Withdrawal On Thursday: CPC heating days for the past week came in at 230 versus the early read at 215. In aggregate last week was the coldest of this winter (like you needed me to tell you that). December 9th was the second coldest (215 HDD’s) and saw the largest draw on gas storage season to date at 168 Bcf. However, it was colder in the eastern and producing regions of the country during that week in December. I’ll be looking for something close to a tie with that week and not an outright beat. Tune in Thursday morning for more on the math behind what should be my low ball estimate to Street Consensus.

Holdings Watch: Sitting on my notes from yesterday as oil waffles and gas rises in a suckers rally. I haven’t pulled the trigger on any of yesterday’s “week ahead” musings as yesterday’s rally continuation looked like too much of a waning head-fake move to me. I did manage to pick off the EOG Feb 60 puts at $0.50 after several hours of low balling my offer.

Odds & Ends

HATS OFF TO MURPHY OIL FOR SENDING ALL GRADUATES OF THEIR HOME TOWN HIGH SCHOOL TO COLLEGE! MUR is still expensive relative to its peers and has had some recent foibles on the exploration side, and is suffering from pretty nasty comps as commodities continue to slide but at least they’re a class act and heads up players at a time when other oil companies (BP) are reeling from repeated swirlies in the bad PR toilet bowl. Even Pelosi and Co. will be hard pressed to dress down a company that uses it’s “undeserved windfall profits” so altruistically.

China National Petroleum Corp Sees 2007 Production Down 5%. CNPC accounted for 58% of Chinese oil output in 2006 producing a record 2.14 mm bopd. This year the company sees a 5% decline to 2.03 mm bopd (a 110,000 bopd reduction) due to a combination of a aging and over-stressed oil fields and lower prices for oil which 1) yield commensurately lower capital budgets for reinvestment and 2) force some new oil projects beyond the realm of economic viability.

  • PTR may get shelled on the news. Keep in mind that CNPC rarely misses their targets since they set pretty conservative (low) hurdles at the beginning of the year (they’ve got the key to capitalism down pat: under-promise and over-deliver). However, this news will likely punch PTR, the publicly traded operator of CNPC’s assets, in the gut so forget what I said yesterday about a rebound until after the pain has subsided. If it doesn’t immediately (2-3 hours) shave 2-3 % off PTR‘s share prices I’ll be in long as a hedge on my other puts. A quick eye ball of the chart says to abandon this position if it, subsequent to my purchase, breaks $120 to the downside.
  • Bulls may grasp briefly at the China card. If spun hard by T Boone and/or CNBC this could provide another fleeting wedge of reasoning in support of oil bottoming around the $50 mark. For that to work, the bulls have got to keep Saudi Arabia’s plans to massively increase surplus production capacity out of the headlines. Maybe they can get the Chinese to shoot down any satellites orbiting over Saudi Arabia so no one can get snaps of the city sized refineries they’re about to build.

Analyst Watch: FBR ups PEIX to buy (don’t those guys use high priced corn to make ethanol?), and Bear Sterns is cutting ratings on most drillers it covers: ESV UDRL, WFT, THE, PDE, DRC, GRP (I’ve been saying this for weeks but they just don’t listen!)

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25 Responses to “Tuesday – Oil Continues To Yo-Yo”

  1. zmann said

    Added a “The Week Ahead” tab above for easy referencing.

  2. ramana said

    Thanks zman for another insightful analysis.
    Let the games begin. :-)

    regards
    - Ramana

  3. zmann said

    Who needs rising production as long as oil is rebounding. Apparently not PTR…it’s up another $1.85. Oil looks tired already but we’ve got another couple of headfake zones to get through today including what could be a big one on the close of Europe today pre inventories tomorrow.

    PETD from yesterday’s comments continues to run following their analyst meeting. Should be see excellent production growth and huge reserve replacement.

  4. zmann said

    Action on natural gas is out of control. Almost looks like panic buying but what happens after the cold is gone?

    EOG just ran up to 200 dma. Thinking strongly about a DD today but this may go on through inventories next week.

    PTR shrugged off a 5% hit to production numbers for 2007

    SLB continues to run hard…HAL not getting the move…yet

    COP up a buck with earings tomorrow. I guess if everyone knows you’re going to suck it’s hard to disappoint. Guidance may stink as well however and analysts are going to be pissed over the company’s high finding costs in 2006.

    PETD rocking. This one deserves the breakout. May buy calls on any inter-day weakness. No puts because they’re very likely to post industry best reserve replacement and find and development costs.

  5. Attacking Mid said

    I’ve already lost my shirt, so I threw my pants into the pot this morning. Now I will stand here and shiver hoping to win the oil put lottery. This is the worst trading I’ve done in a few months.

    Bought a few more EOG 65′s, UPL 50′s, and SU 70′s (would have preferred 75′s, but was low on cash). Could really stand a turnaround about now 8^(

    AM.

  6. zmann said

    Another potential source of today’s oil buoyancy:

    US sends more ships into Gulf as way of telling Iran, according to Robert Gates, that the war in Iraq has not overstretchd US forces. Then one of our undersecretaries said negotions with Iran were out of the question unless it stops enrichment. No wonder these guys, and many in the middle east, think we’re going to neotiate via cruise missle. Meanwhile, Ahmadinejad is conducting missile tests in the area.

    Tonight’s state of the union could also rally oil further as the president makes more threats.

    Ethanol producer PEIX up nicely today on an FBR upgrade owing to the belief that tonight’s State of the Union comments will call for U.S. ethanol production to rise from 7 billion gallons at present to 60 billion muey pronto. Corn futures going nuts.

  7. zmann said

    AM – I am sorry to hear that. I honestly think we’re lower within a week, maybe two at the outside but maybe a little XLE call insurance is warranted. I’m still holding all my ideas from yesterday in reserve(see Week Ahead tab).

    I’m getting poleaxed on my EOG puts from yesterday but am not doubling down until I see sustained flattening or a turn in the commodities.

  8. zmann said

    Fun fact of the day:

    It takes 7% of the US corn crop (to produce ethanol) to offset 1% of US demand for oil for gasoline. So in the future you will be able to drive, just not to a steakhouse.

  9. zmann said

    Bush’ll almost certainly mention clean coal as another way of reducing America’s dependence on foreign energy. EEE regularly moves 15-20% so it might be worth holding calls overnight.

  10. zmann said

    From Forbes this morning:

    Market participants expect an 800,000-barrel drop in distillate stocks, which include heating oil

    and predict another gain in crude stocks of 700,000 barrels.

  11. zmann said

    Update on inventory expectations:

    U.S. crude-oil supplies probably rose last week as refiners began maintenance programs, a Bloomberg News survey indicated.

    ** Supplies rose 1.3 million barrels – I’d think it’ll be bigger since refining capacity is expected to be down again to 87.5%

    ** Gasoline inventories probably rose 1.7 million barrels – sure, why not?

    ** Distillate inventories probably fell 250,000 barrels – I said earlier that it wouldn’t be a big withdrawal but that seems like a really low ball estimate to me designed to disappoint in favor of the bulls. Even Fimat is expecting a bigger withdrawal and they always bag their estimates!!!

  12. Raj said

    Z,

    $XOI is up 10 points in last 20 minutes. Any ideas

    R

  13. zmann said

    Oil and the stocks had been starting to fade a bit but at precisely 2:00 oil started jumping and went through $54. XOI stocks were a fraction of a second behind. Let’s see how it does into the NYMEX close but if its strong I’d take any on the long picks on the “week ahead” tab that aren’t already up 5% (no kidding) and go long calls for an afternoon drift higher.

    Maybe some blew up somewhere because it rallied another $0.40 while I typed that first paragraph.Unreal.

  14. zmann said

    Just saw on another site there’s talk of doubling the SPR and beginning the refill of the remainder of the 11 mm Katrina aid barrels in the spring.

    Bush’s desire to 2x the reserve is old news. The refill is going on already. But they’re shooting for $55 today.

  15. Raj said

    BUSH TO CALL FOR DOUBLING CAPACITY OF STRATEGIC PETROLEUM RESERVE TO 1.5 BLN BBLS BY 2027 – OFFICIAL – Reuters
    Briefing.com – January 23, 2007 2:00 PM ET

    R

  16. Looks like the oil rally is a bunch of bulls pissed off by tanked longs before last weeks inventory.
    Bush is also calling for a 20% decrease in gasoline usage by 2017

    -SaneO

  17. zmann said

    Wow. 2027. Sounds like a long way off but if you take into account that it’ll take at least 3 years to get the first portion of the new storage facilities ready to receive oil that leaves 17 years or 884 weeks to add 750 mm bls or 850,000 bls per week of new “demand”

    Meanwhile, Energy Secretary Sam Bodman said it shouldn’t effect the gas markets or raise prices.

  18. zmann said

    …And just days after Saudi Arabia announced an increase in production capacity. The Saudi’s knew what and when Bodman was to say.

    Sane – no one’s going to believe Bush on the conservation side…at least not oil traders.

  19. true

    -SaneO

  20. zmann said

    Look for Saudi Arabia to take a more aggressive stance vs Iran in the coming days. We just paid for it by offering to take up the slack and their new capacity expansion announced last week.

  21. zmann said

    Didn’t count on our own government blatantly pumping oil. China is quietly filling their new SPR. Why can’t we? And doubling it? What for? No new puts for here until after the inventories. I may take a call position or two this afternoon as we could drift higher into the close as has been the case when oil ran up into the NYMEX close. I guess I can forget that $50 test this week, huh?

  22. nltd said

    To me the crux of this adding to reserve for today is this: Do they have a place to start putting 100K barrels per day now?
    If I understood you right, Z, they don’t. Is that correct? If this is three years out, then it’s pure pump for now, and we have to figure out how long they can play this before we want to buy puts.
    On the other hand, if this starts immediately, puts not such a good play, eh?
    N

  23. zmann said

    Definitely can’t do it now although they plan to repay the 11 mm bls borrowed for Katrina from now on a few 100K bls per week.

    We’ve got storage capacity for 750mm bls now plus we add a few million barrels of capacity annually through calving in the salt caverns where a majority of the oil is kept. I’m guessing it would take at least 3 years to set up the recieving terminals and pipelines before oil can be received at new sites. Maybe a bit faster if we rush it and they’ve already approved the sites (which I’m sure someone has thought of).

  24. nltd said

    Z

    Thanks for your continued thoughtful analysis and answers to those of us so much less aware than yourself. Hope this latest “stuff” will play out quickly so your puts will prosper. I chickened out and lightened up into weekend. Looking for re-entry if it looks like the pump is fading. . .Thanks again.

    Like the value of a dinar on payday indeed..that’s a good one!

    N

  25. zmann said

    N – Thanks for reading and keep firing in questions. “Stuff” has a way of surprising you in how long it takes to play out but I’m both sides of the trade right now. Only regret is that I didn’t fire off more calls Monday on NFX and SFY but then who knew Bodman worked for THEM.

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