zman’s Energy Brain

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Thursday Mornng – Waiting For Opec To Exhale

Posted by zmann on October 19, 2006

Opec Watch: Ministers Gather In Doha, Qatar. At $55.27 the Opec blend of crudes is approaching the lowest levels of the year. Opec has continued to provide the mixed message of:

a) tight world-wide supply/demand fundamentals (prices need to be high because there’s ever growing demand) and

b) increasing OPEC surplus capacity (we’ve got lots of the stuff, and we can produce even more). Scratch head here.

This chart of the Opec Basket of crudes, taken directly from Opec’s web page, represents their “emergency”

opec-weekly.JPG

That looks pretty bad. Until you look at this.

lpec-annual.JPG

They should probably take that last one off the web page. People might get the wrong idea.

Can you say overbought? Come on guys face facts:

–Non-opec supply continues to advance, demand growth has decelerated in the US, EU, and Asia resulting in inventories levels that are above the five year average for crude and products. You’ve had a nice run but there has been no significnat degredation in supply nor pronounced “China Effect” in demand.

–Middle Eastern unrest remains high but honestly, the terror premium is pretty played out. Repeat after me, Iran needs our $ morn than we need their oil.

–And Saudi Arabia, at a third of Opec production, has repeatedly indicated its desire for lower prices. Notice the lack of comments from them of late. They’re much more concerned about heading off a Shiite proposal to divide Iraq while working to quench sectarian violence in their neighbor than they are with artificially propping up oil prices so Iran can continue to strenghthen its military.

–Algeria says it will cut a maximum of 50,000 bopd towards the proposed 1 mm bopd cut. That’s about 2.5% of their production versus a 3.6% cut for Opec using September numbers so they’re not really onboard either. Algeria’s oil minister commented yesterday that a reasonable price for the Opec basket is $50 to $60. Algeria, though one ( of the smaller Opec producers, has orchestrated a production boom in the last few years via foreign oil company participation and their voice should add weight to Saudi’s towards moderation.

–Iran, Venezuela, and Nigeria, troublemakers that they are, want cuts to be taken from quotas, not actual production since they are unable to achieve production levels near their allotments due to lack of investment, negligence, and rebels respectively.

Today’s Big Energy Event: Natural Gas Inventories. Estimates range from an injection of 40 to 70 Bcf with consensus at 46, according to a Bloomberg survey of 15 analysts. 70, are you kidding? Note to analysts: Stop trying to drag consensus higher to force a miss. Have some dignity.

Gas Price Are En Fuego North of the Border. The 20% price rise in US gas futures this week isn’t without company. Alberta prices have shot up 42% in the last 2 days. Canada ships about 10 Bcfgpd south of there border so expected colder weather next week here has lit a fire under prices.

Analyst watch:

– B of A cuts OMM (one of my priced to perfection stocks) from buy to neutral. I guess it does matter to tanker day rates if less oil is sloshing around the world’s oceans. Unfortunately I did not have a position here yet but will watch for an entry on the put side after the Opec dust settles.
Holdings watch:

–Ouch. HSY reports $0.78 vs $0.81 expectation, little light on the top side as well. For 4Q, expect sales to be in line with previous guidance but slightly below plan on earnings. 2007 looks to be in line. I’ll continue to watch this one after the conference call. Should get whacked over the headlines, dumping the November calls for a possible entry.

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10 Responses to “Thursday Mornng – Waiting For Opec To Exhale”

  1. zmann said

    MMR missed on top line by 10%. Production of 75 mm/d waslight of guidance of 80 to 85 for 3Q. 4q guidance now 75-80. It’ll be interesting to see the reaction to this small, firsrt reporter in the E&P sector.

  2. zmann said

    More on MMR First pure E&P player to report. Guided 4Q flat to slightly higher but missed 3Q production by about 10%. It’s a Gulf of Mexico player so with no hurricanes as an excuse, it could be judged pretty harshly. It’s a small company but very high profile, flamboyant management.

    Drilling results remain tepid. Last quarter they talked about going 12 of 23 in their main play since 2004. Now the tally stands at 12 of 25. Not good when you’re fighting 20% annual declines in your core.

  3. SoccerF1 said

    If memory serves, OPEC members have “cheated” on every “cut” since 1975.

  4. zmann said

    Absolutely but this time, most of the more vocal members don’t even want to pretend to cut, they just want their quotas reduced to “talk up” oil prices. I think traders have got Opec pretty pegged on this or we’d be $5 to $10 higher already.

  5. zmann said

    Troy,

    ECA Oct 25, expectations are for $0.93 for 3Q and 4Q which seems unlikely given the marked declines in oil prices since then, couple with a rebound in gas prices (which is big cost for them).

    There’s simply not enough production growth to get to the 4q number.

    Also, they’re relatively unhedged begin in 2007 so low prices are going to start to hurt more.

  6. zmann said

    Saudi in favor of Opec cuts coming from production (not quotas)

    signalled more cuts may come at Dec meeting

    details on who is cutting how much look liely to come out later today.

    If we hold below $60 then I think oil sells off in coming days as traders begin to worry more about opec’s biggest concern which an expected advance in non-opec production next year.

  7. wajih said

    any possible play on SLB earnings?

    they are so confident, they have to beat expectations

  8. zmann said

    Wajih,

    I’ve thought about that a couple of times and can’t decide what to do so I’m sitting it out. They’re very unlikely to miss estimates but will the upside surprise be big enough to support the stock’s valuation. Coin toss in this market is too risky for me. I think over time, they’re going to come down as drilling activity levels off in 2007 and their growth rate starts to slow. But as for tomorrow, management is highly skilled, and very positive (as recently as last month) on their fundamentals.

  9. zmann said

    wow. 53 Bcf injection. Pretty bearish for gas. I’ll update charts tonight but we’re still on track for close to 3.6 Tcf in storage at month end.

  10. wajih said

    thanks zman.
    i’m going to sit it out (at least with options) …
    i have some stock that i am going to offload soon…
    let’s see how high it will go.

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