zman’s Energy Brain

oil, gas, stocks, etc…

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Friday – T.G.I.E.

Posted by zmann on November 17, 2006

Thank God It’s Expiration
These days are usually uneventful and, while I’m not a big fan of “max pain”, the stocks seem to be meant for certain levels by days end but often get there early. Then they trade sideways on light volume. In other words after 11 am its pretty boring and only cheap gambles on volatile stocks are worth your time and money.

Oil is getting hammered this morning in Europe and on its last day of trading, December crude is in the mid $55s in electronic trading at present. I’ll bet we get more Opec threats, rebel rebellion, a massive production disturbance from BP (it’s been almost 2 weeks now and the technicals are getting pretty dire), a statement from Bodman saying oil’s too cheap now, or some combination of the preceding mid day so hold on to your butts and be careful with your trades.

Why did oil get snaked yesterday? Oil fell $2.50 yesterday and is down $4.75 (10%) over the last 5 sessions. To me it looks like a combination of five factors:

—Middle men & exports. According to the EIA, middlemen and customers have been taking on inventory to take advantage of current low prices in advance of winter weather. Moreover, an inordinate amount of gasoline is being shipped to Central and South America.

—Opec cheating. Ok so that’s not really new but word from CNBC that liftings were actually up as recently as a week ago made CNBC and may have contributed to the slide late in the session.

—LOOP closure. Its open, wait, there’s a strong breeze and some fog, better shut the biggest oil receiving port we’ve got. It was closed through Wednesday but was supposed to reopen Thursday. Who knows for how long.

—End of contract and technicals. The December contract expires today so some of the sell off is attributable to that. This is like the third month in a row to end on its lowest levels for 2006. Moreover, the USO ETF, which is based on the price of the WTI futures contract continues to make all time lows. I’m not very impressed with this argument since the January contract got sacked for $2.15 yesterday. If traders are selling December to buy January, then why did it tank 3.5% as well?

—IMF reduced forecast for US 2007 GDP growth. Cut from 3.4% to 2.9%. Keep cutting Opec, you’ll get to the right number (about 25 mmbopd to get to $60) any day now.

American Petroleum Institute shows crude inventories increased by 6.7 mm bls yesterday! That’s a big gap to the EIA number. API says its a matter of different survey methodologies (more careful) for the weekly change but that the overall inventory amounts are very close.

From an AP story last night: Even as oil prices fell through the low end of that range ($57 to $61) Thursday, many analysts remain bullish in their outlooks, citing concerns about instability in Nigeria and Iraq, a recent drop in U.S. refinery output and trading patterns that suggest the market is preparing for a late-year upswing. Comment: Talk about grasping for straws to keep from breaking the oil camel’s back. Fellas, that’s just sad. Just about as sad as the parade of pumpers CNBC hauls out every time oil hits a new 2006 low. Of course they’re bullish, 80% of ratings are buys and bonus season is just around the corner. Sell ratings don’t generate a lot of commish, capiche?

Natural gas got whipped. December gas fell $0.365 to $7.75 on the unexpected build.

—We got a build of 5 Bcf versus an expected draw of 1.5 Bcf (come on CNBC say 1 or 2, you can’t get a half!). I get style points but no dollars for hitting the number spot on in comments yesterday morning. Whoopty do.

—Anyway, looking at the weather I’d say we are likely to see a number of around flat to down 10 next Wednesday (they moved it up for the holiday) as the old forecast looks to have been a little warmer than what actually happened this week.

—My point is that it doesn’t matter as long as we’re staying near record levels and not chewing through storage yet. The average November sees gas supplies fall by 181 Bcf.  Last year, with the aid of supply crunching hurricanes, November inventories fell 328 Bcf (the second biggest month of demand in November on record). We’re 10 days through November 2006 and we’re up actually up a few B’s.

—Even if we have the worst winter on record, gas in storage should only fall to just below the middle of the average range. Looking at this chart you can see where a warm winter will leave inventories. $8 gas is hard to explain in either scenario.

Analyst Watch: B of A says E&P capex to rise 4% in 2007 vs 38% in 2006. Get your OIH index puts here. Drillers should get macked on this news as it’l put the breaks on day rate advances which have gotten out of control of late. Ditto service.  How these guys issue this kind of a bombshell and don’t downgrade a single stock or cut a single earnings estimate or price target is simply beyond me. Plus, why issue this on a Friday, don’t you want people to read it?!

Holdings Watch:

—Still have puts on (and like to the downside) SU, PTEN, HAL, HOC, FRO, LNG, GSF, and OMM. Have puts and calls on XOM.

—Gassy names that should retreat from here: EOG, KWK, BBG, and DVN.

—Oil names on the downside hitlist: BRY, TSO, SUN 

—Names I like long but not necessary today: CHK, SFY, SWN, and CRR. – for now consider them waiting for lower entries but definitely not short candidates.

21 Responses to “Friday – T.G.I.E.”

  1. Attacking Mid said

    Crude really plunged overnight, but is recovering this morning. It’s also looking like the stock indexes may be down today. This could set up a great oil stock call-buying opportunity to hold over the weekend if oil & oil stocks get hammered today. If oil stabilizes or rises a bit on Monday, I’d expect to see at least a brief buying spree on oil stocks.

    Will see how it all unfolds throughout today.



  2. zmann said

    Agreed, took some more XOM calls for the bounce this moring with the stock at $72. So far so good with USO getting a dead cat bounce. Covered the SU puts I thought were dead so it’s not all grim. I’ll be back out of XOM if/when we top $73.

  3. zmann said

    BP announced transalaska pipeline was shut for 10 hours thursday. I’m not making this up, it’s like clockwork.

  4. BP = Barely Pumping®


  5. zmann said

    Wait until these guys getting bigger into solar, then the sun will never shine. Maybe BP stands for Burns Petroleum.

  6. zmann said

    LNG – the company – trying to hold $28. If it breaks through look for a quick drop back to pre upgrade and debt roadshow levels – $25-26.

  7. Attacking Mid said

    So far, I’ve done okay… sold SU puts early in session before the stock rose. Bought ’em back when stock was up 40+ cents. Am back in the black again. Now, do I hold ’em over the weekend or flip to calls? Hmmmmmm……

  8. zmann said

    Opec is going to have some serious words for the price of crude Monday but who knows if anyone will care for long. Could provide a good entry pop in the am. Long term I am definitely anit SU

  9. Attacking Mid said

    I’ve got a trading rant…

    As a hobby trader who prefers options, I am constantly battling that stupid NASD “daytrader” rule. Since options positions don’t count as “equity”, I’m frequently in a position of having less than $25K of “equity”. Since my trading activity earmarks me as a “daytrader”, then I must liquidate options positions in order to get my equity back above $25K if I wish to place any other buy orders.

    I can have my broker (IB) reset my status once every 180 days, but then I am handcuffed by trying to avoid more than 3 daytrades in any 5 day period. This is the situation I’m in right now – I have one day trade left for today.

    I wanted to sell my SU puts again today when SU was down $1.10+, but didn’t cuz I didn’t want to “waste” my one remaining daytrade. Now I’ve lost thousands of dollars as my puts have gone back down in value. Sure am glad the NASD is looking out to save me from myself! Arghhhhhhh!!!!!


  10. zmann said

    hear ya arghhhhhh. been there before.

  11. Attacking Mid said

    Jan Nymex contract formed a perfect double top at $58.90 on the intraday charts. We got a spike-low bottom of $57.80 in between. Question is which will hold?

    Stepping back a bit and looking at the bigger picture: barring a major news event, what’s out there to prevent crude from falling further? The world currently has excess production capacity, there must be a traffic jam down in the GOM of tankers waiting to unload, and lower crude prices will not result in significant demand increases. Seems like a classic buyers market if you ask me.

    OTOH, who can even imagine what kind of shenanigans interested parties around the world might pull to actually or perceptibly reduce production.

    I am a short/intermediate term bear on crude and a long term bull. Hoping to make a few bucks on the volatility by guessing right more often than wrong.


  12. zmann said

    juust got back in. sold those Nov XOM calls i bot for .15 this morning for .50. I should leave more often.

    Am – my thoughts exactly. I’m a huge bear on nat gas as well because pricing simply makes no sense and although “all the easy stuff was drilled up years ago” they keep finding huge pools of it like the shale plays of the last 3 years. N. American declines aren’t nearly what the E&P guys would have you believe.

    In the interim, I’ll trade both sides while waiting for things to make sense.

  13. zmann said

    just took SUN 65 Ps for $0.25 – probably tempting fate too much but this rally is unwarranted.

  14. Attacking Mid said

    If I had the margin capacity, I’d like to sell a bunch of Nov DVN 70 calls for $0.20. I bet DVN finishes the day at 70 even.

    I don’t follow SUN. Did you take Nov OTM puts?

    Crude’s trying to push through the double top, but so far can’t gain traction.


  15. zmann said

    for last week, last day to expiry I take only ITM or very close to strike puts and calls.

  16. Attacking Mid said

    If you’re confident NG will drop, you may want to play the puts on UPL. Last I looked at them, they did very little hedging and the stock is fairly volatile.


  17. zmann said

    thanks for the tip, havn’t looked at ultra in a long time. silly not to hedge these prices. when you look at the big gas players like CHK most are very hedged, if nothing more than to protect their capex for next year. some are already saying , like COG, that bugets will be down next year to combat price inflation. i’ll look at upl over the weekend.

  18. zmann said

    Check out the BS pump in USO at EOD. $0.35 and counting in 5 minutes. After close of nymex we should the quick gains in stocks back off into the close. Of course, I could be wrong. Eitehr way it’s just a gamble for today.

    SU should be getting killed on the huge updraft in nat gas…anybody see anything on why the huge rebound in gas or is it just cooler weather?

  19. Attacking Mid said

    I’m a little gun-shy of NG and related stocks. I got greedy last year when I made a bunch of money on NG stocks. Got caught with my pants down when NG turned down toward end of the year. Lost BIG. REALLY BIG.

    Somehow, I don’t seem to understand that market. I never worked in that side of the biz (I’m a former Shell Oil financial grunt). I feel like I understand the e&p and crude sides better, though probably just enough to be dangerous!


  20. zmann said

    Sold those SUN 65 Nov puts for $0.55 (bot earier for $0.25). Looks like its about to fall but a double is double – especially in 2 hours

    I used to be a gas and E&P guy (former life). I can wing it ok on refineries and majors but I’m out of my depth utilities and lots of the alt energy stuff. I watch the coals, solar, wind etc but rarely play.

  21. gungagalonga said


    I dipped my toe in today and went long 1 eminy Jan 07 CL. The Jan contract just seemed to be reaching too far on the downside due to expiration.

    I also think there’s more strength in this stealth economy than appears and demand will be strong in Q406 and Q107. OPEC will also likely raise their collective voices to talk this market back up. In the absense of bad news, this may be all this market needs for direction.

    However, I am aware of the storage situation…

    In summary, to me, it seems more likely that the bulk of the short gains have been made and that the risk is greater being short vs. long.

    I’ll mull this over a bit more over a few pints this weekend at Don’s Depot…

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