zman’s Energy Brain

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Wednesday Wrap – OIL Boils Over

Posted by zmann on October 25, 2006

Oil Jumped $2 to $61.35. “Golly Moejee,” you say, “that’s a big jump!” But wait there was cause for it. It was a big news day with “bullish” inventories, rebels on the prowl in Nigeria, copycat nuclear megapower wannabeism, and finally we have Opec saying, “we mean it, we’re really cutting shipments, we promise this time.”

— Bullish Inventories: U.S. crude supplies fell by 3.3 million barrels in the week ended Oct. 20, the Department of Energy said Wednesday. Motor gasoline supplies fell by 2.8 million barrels and distillate fuel supplies fell by 1.4 million barrels. This is one week. The fundamentals remain pretty bearish (shhh, don’t tell anyone I said this).

“We still are adequate as total inventories go on crude, but we have seen two decent-sized draw-downs in last two weeks, contrary to expectations, said Tom Bentz, analyst at BNP Paribas Commodity Futures in New York. – Those

Crude Inventories Still Look Like This: (sorry the chart’s so ugly but I used one of the EIA’s instead of my own – you get the idea though – not exactly a screaming buy)

crude-inv102007.JPG

— Rebels Seize Pumping Stations In Nigeria: Nigeria reported another wave of rebel rebellion with villagers overrunning a number (no one is really sure how many) of pumping stations. Although details are scant as to the amount of production impacted, Nigeria expects to have the situation under control shortly. So funny it’s sad.

— Adineednejad Says Me Too. In an effort not to be left out of the race for Nuclear Nutbag of the Year, Iran started a second line of centrifuges. This was announced in the middle of the night, right before the Nymex close, but I’m sure that’s a coincidence.

Opec Countries Telling Customers The Cuts Will Happen. Dow Jones  newswires are reporting that Saudi Arabia, Iran, and the UAE are telling customers that shipments will be reduced as stated. Commenting on that Oppenheimer & Co. analyst Fadel Gheit said “I have no idea that that’s going to happen. You could be telling certain customers, and not others. OPEC has hundreds of customers.Talk is cheap. Oil isn’t. These guys have a way of playing with the market. As long as the market is receptive … they can have their cake and eat it too: high oil prices and high production at the same time.” What a cynic.

Natural Gas, Not To Be Left Out of the Party, Rallied As Well. This makes no sense. Which makes perfect sense in this market. I’m looking for a 30-35 Bcf injection tomorrow followed by at least 2 more before the end of the season. I have not seen a consensus number but will post it in comments when I do.

Fed Leaves Rates Unched… Then the Fed proved that it did do some work since the last meeting by changing one sentence in the meeting press release while leaving rates unchanged …again. The Dow jumped into super rally mode, then paused, jumped again and finally plummeted back to where it started before the announcement. Before jumping again. Silly market.
…Giving XOM the green light to hit its all time closing high. And on the eve of earnings. Nice. You’d think they built a new search engine or sold videos downloadable into small, portable and very sleek players,but no, they just sell oil. And they expect the price of this oil to fall and they don’t plan to sell much more of it next year than this year. This run puts XOM at 11.6x forward earnings, at the upper end of the five year chart as previously discussed, and even counting today’s little commodity run, the stock remains completely disassociated from what it sells. I stop using that chart when it stops being so ironic.

XOI up 1.4%/ XNG up 1%/ OIH up 2.5%. It was a Green Screen day except for MUR, PPP, and a four or five others. Given the level of griping from the E&P companies about costs and the continuation of strong drilling activity, especially in the US shale and CBM plays, it seems fair to me that the OIH is running. At some point (wish I knew when) either service rates need to come down or the commodities need to rally (wish I knew which one). Otherwise, E&P margins are going to get squeezed.

One Last Thing: Tankers Rallied With The Energy Group. Now this really makes no sense. Imports were off 1 mm bls last week and Opec is really cutting (right?) so there should be less business for these guys. Yet the tankers held up (and in most cases rallied) pretty well, just like in the cast of the E&P companies who have pretty successfully stared down a 25% drop in crude and a 30% (until recently) drop in natural gas over the last few months. One thing is certain, the amount of silly money in the market and in the energy sector has reached unprecedented levels. This probably won’t change until some down and out group becomes the favorite. I think I’m going go look for those guys.

Analyst Watch: Goldman tagged PPP with a sell after what on the surface looked like a pretty good quarter. Aren’t those Goldman guys supposed to like everything oily right now? Lehman, also a sell rating, whacked Pogo’s price target by 15%.

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8 Responses to “Wednesday Wrap – OIL Boils Over”

  1. ramana said

    Excellent and erutdite write up. I am so glad to have access to all this information so nicely summarised for me. Thanks zman, I really appreciate it. If markets arent rational your analysis are, its reassuring for folks like me. 🙂

    Keep up the good work.

  2. ramana said

    I meant erudite…which you are.

  3. Tom2oc said

    Well, looks like FA wise this rally of today might not last too long. Thanks for the summary. What a crooked sector!

    Is XOM reporting pre-market or after market?

    Tx

  4. zmann said

    test

  5. zmann said

    sorry, having a little trouble commenting on my own site! Ramana, stop it, you’ll embarrass me but thanks for the commennts. Some day this market’s going to make sense and I plan to be there to se it happen.

    Tom – XOM is am. conference call at 11 est.

  6. Tom2oc said

    thnaks for info. Whatever they come out with for earnings, it’s difficult to imagine guidance to be that good. Oil crooks better hope they’re not going to miss earnings…

  7. zmann said

    Another story on the demise of 4q tanker rates.
    http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=114194&version=1&template_id=48&parent_id=28

  8. […] took (Bush, not Ford and Corker!) along with a draw down in crude to send oil flying. Zman did an excellent wrap-up of the day in oil so I’ll leave it at […]

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