zman’s Energy Brain

oil, gas, stocks, etc…

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Friday Morning – I’ve Got That Neutral Feeling

Posted by zmann on March 9, 2007

Morning Comments: Flattish broader market (at least ahead of payrolls), flattish oil and gas indications. No picks today but a “Big Picture” picture show.

Yesterday saw slight declines in both commodities:

  • April crude couldn’t hold on to a rally over $62 settling down $0.18 to $61.64 despite continued strength in gasoline prices. That rally looks a bit long in the tooth and most likely snaps back 5% or so with the first full percentage point bump in refinery utilization and/or significant rise in gasoline imports.
  • Natural gas fell $0.13 to $7.24 on the 102 Bcf withdrawal (actually 90 – see Odds & Ends below). Next week’s number should be bigger with the recent cold snap but gas may still make a run at $7 as traders look towards the slacken demand of the shoulder season and the likelihood of trough storage that is 15 to 16% above the five year average (and down about the same from year ago levels).

So where are we relative to historic levels of gas storage? Note: The EIA made some adjustments to their historic data but have not yet released a new version of the database for download (more on that in Odds & Ends).

  • 14% or 268 Bcf below the year ago figure. Last week we were only 12% into YoY territory (239 Bcf) so now the EIA must have taken storage numbers for last spring up.
  • We’re now much further above the “new five year average”. At 13.5% or 194 Bcf above the five year average of 1,437 – the five year range appears to have dropped pretty massively in the revision since we were 11% above it last week and we got a bigger withdrawal this week than a year ago. That seems odd.
  • EIA says that if demand holds at 5 year average levels for March that trough storage will be at 1,426 Bcf – that’s a little higher than the 1,400 Bcf I expected last week despite a big withdrawal…need to see those new numbers.

Nevertheless I’m starting to think that natural gas prices won’t get the large retrenchment I had once expected. I’d bet on a short term sell off during the shoulder season but then upward pressure from a plethora of sources including everything from budgetary constraints to threatened shut ins to hurricanes to La Nina to falling imports from Canada. So I’m transitioning from bearish to neutral and doing the homework to have long bets in place when/if I feel the time is right.

Does this mean I pull my remaining shorts? No! I’ll scale out over time just like I scaled in. Like I said, I still think there will be a period of seasonally induced natural gas price weakness ahead that could lead to a pretty good washout in my current  put names. Then I go to cash and then long.

Here’s a very cursory inspection of the latest gas data as I mull over getting a little bullish. I know it’s shocking since I’ve been bearish since the inception of this blog. For those of you using me as a contrarian indicator (you know who you are!) this is your first and only warning to take profits on longs. Note: service stocks are a different matter and I’m unlikely to get bullish unless they get thrashed this spring as they are earnings momentum animals and they appear to be decelerating (see my note on dissecting the OIH here).

The Near Month Future On This Date In History – Funny how that looks like the broader market.

mar-7-historical-gas-price.JPG

That seems pretty odd given high storage levels. Like I graphically depicted here storage-vs-price.JPG last Friday, the correlation between price and storage seems to have broken down back in 2003.

Let’s have a cursory look at supply and demand. None of this is really new but it lays out the bull perspective pretty well. Early March is an interesting time to analyze past supply and demand because it’s the first time each year that EIA data gives you a first look at the entirety of the preceding year. Granted the data is subject to revision for quite some time but it’s usually not far off their final numbers.

U.S. Annual Gas Production (Bcfgpd)

gas-production-annnual-through-2006.JPG

I’m not bothering with getting this down to dry gas production but am instead just illustrating the point that US gas production is essentially holding flat. It hasn’t been growing but it certainly has not fallen off a cliff. Production may actually increase ever so slightly this year as Shale and non-conventional Rockies growth outpaces reduced output from the Gulf of Mexico.
…And It Has Taken A Rig Count Like This To Simply Maintain Production

rig-count-030707.JPG

Rig count data courtesy Baker Hughes

Other Supply: EIA Still Says LNG Volumes About Skyrocket. According to the EIA: EIA expects total liquefied natural gas (LNG) imports to increase from their 2006 level of 580 Bcf to 770 Bcf in 2007. LNG import projections remain strong for 2008 as well, expanding by 39 percent to exceed the 1 Tcf mark. Comment: That’s an additional 0.5 and 0.8 Bcfgpd in 2007 and 2008 respectively and I’d say that’s pretty gas price bearish but it’s one of the few things you can easily point to beside demand to get real bearish about. I think the analysts will heavily discount rising LNG againsts stories of fall Canadian imports.

Canada: Imports Are Rolling Over Or At Best Not Growing…

canada-through-2006.JPG

…And The Situation Looks Even More Bleak When You Consider The U.S. Volumes Headed North Of The Border Keep Rising.

Net Imports From Canada:

net-canada-bigger.JPG

Many analysts are calling for a 1.0 Bcfgpd drop in net imports from Canada as production falls and oil sands projects and domestic demand keep more volumes north of the border. That’s been argued for a long time and while those factors play a role I wouldn’t expect such a dramatic, one year drop as that.

…And Exports To Mexico Have Plateaued At 1.0 Bcfgpd (Pemex really needs to get on the ball!)

mex-exp.JPG

U.S. Annual Gas Demand (Bcfgpd)

Meanwhile, annual US demand has been falling. The result of warm winters for sure but also a bit of demand destruction. I’ll go into a bit more detail on this over the weekend but suffice it say that the duration of elevated gas prices has curtailed industrial gas demand (not good for gas demand since Industry is the biggest consumer of gas). This has especially been true in Texas which was once home to nearly one-third of all industrial gas consumption but last year was only good for 21%.

tot-gas-demand-through-2006.JPG

All in all, it’s a mixed bag. Production is flat, imports may fall a tick but are probably going to net out as close to flat between rising LNG and falling Canadian supply and demand appear stuck in neutral. I’m feeling pretty neutral myself. Bearish in the near term but leaning towards the other B word longer term .

Odds & Ends:

Gas Inventory Review: The EIA Pulls A Fast One!

My Expectation Was 75 Bcf, Well Below the 102 “Reported”. I was no doubt low but there were mitigating circumstances to the EIA’s 102 number. The EIA included a 12 Bcf adjustment in the numbers.

  • Before yesterday’s report came out, the EIA had indicated that this time last year we had 1,887 Bcf in storage. And the storage withdrawal in the year ago week was 85 Bcf (the guy on CNBC just after the report thought so as well).
  • Now the data shows year ago storage of 1,899 Bcf, 12 Bcf higher. The EIA has a habit of periodically adjusting their historical data without really commenting on it. So the real number for yesterday is 90+ a balancing adjustment of 12 Bcf so I still missed but not as bad as I thought. The EIA database still shows the old numbers relative to yesterday’s summary report.
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22 Responses to “Friday Morning – I’ve Got That Neutral Feeling”

  1. Dave said

    Should be a fun day again today

  2. zmann said

    Dave…It’s a fun day every day, no? USO not looking too comfy here.

  3. Dave said

    Is oil going red ?

  4. zmann said

    Dave — It looks that way. Lots of talk that nothing happens at the March 15th Vienna meeting.

    If you’re a bear you want them to hold $60 pre meeting to assure that the ministers don’t sabre rattle.

    Tom — what are the TA points on END. I’m not looking short term but it could get a pretty good bounce in the next 2 months as they test a significant (for them) prospect. Again not a reason to buy a stock except as a trade. I like these guys long term.

  5. Dave said

    Sold GLBL…..holding GMR mar bull put and some apr puts on GMR

  6. umagumm said

    COP has been outperforming its peers the last few days for no apparent reason

  7. zmann said

    Umagumm – I noticed that. The reason is that I added a short on it yesterday before the number. Nice move, huh?

  8. foo said

    Z – you’re not alone. I’ve got a put on it too. Everyone thinks Warren Buffett can’t be wrong, so they buy it up.

  9. zmann said

    What is the deal with CNBC? They’re bullish about everything, including oil.

    Yesterday they played videos of oil fields and refinery fires every half hour.

    Today prices are retreating and gasoline is down $0.02 and they keep scrolling gasoline futures hit new 2 month intraday high

    When something has risen as much as gas has on the back of a lot of short term convergences they should be looking for a pullback but their mentality seems to be “because it’s up it will go higher”.

    Sad really, the dumbing down of that network. I miss Melissa Francis who actually knew something about oil and gas and flew over to the Opec meetings and would question a lot of the statements traders tried to slip by her in interviews.

  10. zmann said

    One service name I continue to like is CRR, the sand guys. They’re hitting on all cylinders and the stock looks poised for a breakout. Probably need to do a right up on that one.

  11. El Diablo said

    I’ll miss you, Zmann, now that you’re headed to the dark side….

    The ‘break’ in 2003 has nothing to do with gas market fundamentals. In hindsight, everyone looks for explanations, such as Canadian production, decline rates, potential demand, blah, blah, blah.

    Chart Natural gas prices, Fed funds rates, copper, gold, oil, UTH (utilities index), AND S&P500 from 2002 to present. (plus maybe homebuilders as a proxy for real estate prices)

    The same phenomenon explains the coincidental and simultaneous rise of all these markets–cheap money. Whether its from Yen carry or good old fashioned greenbacks, leverage got cheap and everyone loaded up. Plain and simple, too many dollars chasing the same investments, price inflation. More simply, why did the value of your house rise so much in the past 5 years? because of a ‘new paradigm’ for residential real estate? supply concerns? or simply strong demand because anyone with a heartbeat could get a mortgage?

    There is no better or more simple explanation for the strongly correlated rise in these fundamentally disparate markets. I don’t buy the bull market argument in nat gas any more than I do in real estate or copper. The only thing that is going to keep them going is a continual supply of cheap money.

  12. nltd said

    Correct me if I’m wrong, but isn’t Mr. Buffett a long term FA guy?

    Plenty of room for him to be wrong short term…hope your COP puts work, I had the thought myself. May be better entry (I thought) next week after increased gas draw? With this morning’s trading so far, hard to tell (as in what’s new, right?). My Valero page pretty evenly mixed so far. No big winners or losers…

    N

  13. zmann said

    El D – neutral. I’m not uber bullish or anythng like it. I wanted to lay out the bull case for a couple of reasons.

    1) to show I know what they’re thinking
    2) and to show that it’s not as easy a claim as the bulls are making (declining supply vs rising demand…what rising demand?)

    However, if I can make money riding a concept that I don’t completely buy off on (at least this summer) then why not do that? I think we get a wash out when oil and gas retrench this Spring but then rising prices will probably lift some names and I want to be in those quality names at that time. When the rising tide lifts all boats (even the very high cost producers, I’ll be looking to go short but that’s probably several months away).

    I agree with you that its all about the money…as it has been for the last 5 years as GS was ramping their assets in the GSCI.

    I think a lot of what you’re saying is what I was attempting to say in last nights’s post. My apologies if it didn’t come accross that way. For instance, my comments about gas prices in March with the chart saying it looks odd to me….like the rest of the bullish market.

    Anyway, don’t leave. You’d be very much missed around here.

  14. Dave said

    Well time to call it a day. Trying to btc my mar40 puts on GMR for .05. I guess the big people will try to depress the markets in the near future in order to pick up the mar calls cheap as per options exp.

  15. zmann said

    END up 4.4% on 2x volume.

    PTSG hit $1.50

    Meanwhile oil looks lower.

  16. Jon said

    END – It must be the Zman effect!

  17. zmann said

    Jon – LOL.

    Oil getting crushed in the last hour. Good call from the PSW site this am.

  18. wow oil got a mouth punch on a friday t’boot

    -SaneO

  19. El Diablo said

    Why would I leave just as oil and gas are ready to plunge to historic lows?!!

    I’m not going anywhere.

    I will just miss your sound judgment!

  20. El Diablo said

    BTW, just ask anyone from Enron (or New Century Finl for that matter) what a liquidity crunch looks like and how quickly it transpires.

    I hear you not wanting to ‘fight the trend’, but the ‘trend’ in energy commodities ended over 6 months ago, 2 months ago the ‘trend’ in real estate ended. Now there is speculation that the JPY carry trade ‘trend’ is ending and uncertainty as to whether the domestic economic exansion ‘trend’ is ending. If the stars have ever been aligned for the cows to come home to roost (liquidity crunch) now could be the time.

    It appears to me that a lot of writing is on the wall. One of those series of events we will all look back on a year from now and see that it was SO obvious….

    That’s the last of my cliches.

  21. Attacking Mid said

    If anyone is long SU out there, you may be running out of time…. I’m about to bail on my puts (which is why the stock has held up so well yesterday and today despite the big selloff in the stuff they sell). They know I’m short.

    AM., PCI (Principal Contrarian Indicator)

  22. zmann said

    El D,

    So now my judgement is unsound? What made you think it was in the first place?

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