Tuesday Morning – The Return of the Bull?
Posted by zmann on October 17, 2006
Japan Beats U.S. To The Sauce, Again. First it was cars, now Japan’s breweries are beating American ones to brewing a new kind of alcohol. Asahi Breweries, known for having just about the best beer to accompany sushi, is to begin distilling ethanol for fuel from newly engineered Super Cane, the Godzilla of all sugar canes. Asahi is targeting production costs of 25 cents per gallon which could have American producers scrambling like Ford and GM did with hybrids, to come up with a Super Megalon Wheat, especially given yesterday’s price for ethanol of $2.18.
Oil Up Again!? Oil is up in premarket breaching $60. It’s advancing like everything else and the stocks will move with it until both oil and the Dow reverse. If November oil breaks, $61.30, I’m out of every put (except the remaining worthless Octobers) until I see it topping, because the momentum could take you to $65 and then XOM will buy GOOG, cats and dogs will marry, etc. @%#^!!? If you can’t beat em, sit on the sidelines until they run out of steam. As per my previous piece, they may get tired next when the majors start reporting sequentially negative results.
Oil Inventories: Early read on consesus is an expectation of a draw of 900,000 bls. With more refineries down and colder temps versus a week ago, and with 2 mm bls drawn last week, that number seems low.
Hedgies, Wall Street Analysts, and E&Ps Beat The Bull Drum. Despite record natural gas inventories and an expectation by every legitimate weather forecasting agency of a El Nino induced warmer than normal winter, natural gas prices rallied 14% yesterday to $6.44. From the ashes of Amaranth comes multiple high profile funds saying they got a bargain on those assets and that, surprise, gas is undervalued now. Then Barron’s runs this article about the scarcity of oil: http://www.rigzone.com/news/article.asp?a_id=37144, followed by statements from EOG and DVN that gas prices have fallen too far and should rise over the winter.
My response is that gas prices remain well above their historical levels as seen in this graph of annual wellhead gas prices (noting that November and December futures are at $6.44 and $7.89 respectively):
Tell me why they should be higher when the 14 yr average withdrawal season will yield trough storage levels at the end of March almost exactly where we were at the beginning of this year’s season. Really, I’d like to know.
So I ask you, is it more likely that the mythical normal weather shows up, when all forecasts are against it, or is it likely that since we’re going into the withdrawal season at record high levels, we’ll exit it at, well, record high levels? Dream on T Boone. This too, like “$100 oil before $70 oil” shall pass. What is it now “$70 before $50”? That same sort of haircut on gas prices should be about right. See you on CNBC in 2 months.
Opec Watch: Ok, so I said this week’s meeting in Doha is off. Apparently it’s on for Thursday. However, remember that every day oil marches higher it further discounts a 1 mm bls cut, making that sized cut a disappointing event. Furthermore, I don’t believe the Saudis will back anything bigger nor do I think the cuts will take place before December.
Analysts Watch: Bear cuts spanish major REP from out perf to perf. yawn.
Holdings Watch: Stocks to continue to trade in line with DJIA first, then oil, then gas.
–DVN contracted a deep drilling rig with Norway’s Seadrill for their discoveries in the Deep Teritiary trend in the GOM annnounced last month. The rig, now under construction and to be delivered in 2Q08, was contracted for 4 to 6 years at a cost of $690 million, or roughly $470,000 per day. That’s a pretty bullish statement on the find, and on long term oil prices.
One Last Thing: A history lesson of what happens when things snap. Not that that’s about to happen soon but it helps to have the historical perspective. http://www.bloomberg.com/apps/news?pid=20601085&sid=awOJ4CcZJLKA&refer=europe