zman’s Energy Brain

oil, gas, stocks, etc…

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Archive for December 4th, 2006

Monday Morning – Pesky Speculator Checkup

Posted by zmann on December 4, 2006

Natural Gas – Recent Peak in Net Long Position Could Spell Trouble For Gas Prices. As can be seen in the chart below, speculators have been increasingly going long all year and managed to stem the tide of decline in gas prices only at the end of summer. In other words, the majority of the guys who do this for a living were wrong for most of this year. Only recently, as the longs have modestly paired back their positions has a short covering rally yielded high prices (along with a bounce in oil and colder weather).

cftcdec4a.JPG

Historically swings in the net long position have yielded a change in momentum and direction for natural gas prices. It appears that the liquidation of the net long position puts a lid on prices as speculative excess exhausts itself. We may be at one of those pivot points right now for natural gas.

The long term chart demonstrates this relationship better than the preceding paragraph so you don’t have to take my word for it. Keep your eyes off the tail end of the chart which is the glaring exception to this rule owing to a certain storm named Katrina which the speculators obviously weren’t expecting.

cftcdec4b.JPG

This is more of a big picture update and in the near term, dipping prices will likely lead to some pretty spiky trading in gas. However, the recent doubling of gas prices should lead to more profit taking and a smaller degree of short covering. As far as the stocks go, they usually run out of steam and are forced into profit taking mode before the cold weather even ends. When that happens LNG (the company), EOG, and APC (yes one of the current virtual gas longs) come rapidly into the cross hairs for puts. I’d steer clear of the temptation to buy puts on CHK, SWN, and KWK as they are highly hedged and have the uncanny ability to announce meaningful production increases or other news that will jolt their stocks and cause you to lose sleep.

Trading Sentiment: Standby On Stocks, Fundamentally Bearish On Gas, Neutral Sentiment On Oil. How’s that for broker speak? Last week I said I was mostly sitting on the sidelines until the upward moves in oil and gas made more sense to me or reversed. This worked out pretty well as most things went up about 5% and I only initiated one new put (SU) and didn’t get crushed on the legacy positions. I see no reason to jump in front of the train at the beginning of this week either. I think it’s time to wait, watch, and as alway fight the temptation to buy XOM and it’s peers which continue to add market cap like the national debt.

By the way, when I say neutral on oil, it’s not a reflection of my thoughts on the fundamentals but of the likely price action of the commodity with neutral meaning the same thing as coin toss which is not how I like to invest.

On the one hand you’ve got 1) Opec and Opec wannabes trying to support crude prices through a variety of means from idle ramblings meant to talk up prices (much like fed governors with the economy) to taking a pretty weak stance on platform jacking rebels, 2) a homegrown consortium of refiners who are all taking a pretty casual pace this year with their annual maintenance programs thus helping to burn through once high products inventories, 3) cold weather, 4) a wave of socialism in South America with the most recent result being the nationalization of gas interests in Bolivia, 5) the war in Iraq, 6) spreading conflict amongst oil producing regions of Africa, 7) yada, yada, yada.

…On the other hand you’ve got 1) recent surveys showing Opec cut compliance at barely 60% of total, 2) declining VLCC tankers rates which would appear to confirm the prior statement, 3) a weakening economy as demonstrated by the CPM and ISM falling below 50 last week and a too long inverted yield curve point towards the increasing use of the R word in the new year, 4) the knowledge that oil prices fell after the last Opec product cut (buy the rumor, sell the news for Dec 14), 5) the fact that the refiners have to go back to work someday, 6) the 10% rally in crude in the last 10 days, 7) my belief that secondary and tertiary demand has been soaking up products inventories and will initially limit the impact of colder weather when winter really hits, and 8.) a warm long range forecast (ok I’ll admit the last one is pretty lame but you can see at least why I ‘m a little directionally challenged on the price of oil right now).

Early Price Indications: Oil and gas down this morning on profit taking. Fimat says any corrections should be short lived as they believe traders are in “buy the dips” modes due to all the concerns I wrote about 2 paragraphs above.

Analyst Watch: nada

Holdings Watch: nada

Sorry for all the caution but I’d rather be gunshy than a gunslinger in an unsure market. Have a good day.

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