zman’s Energy Brain

oil, gas, stocks, etc…

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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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16 Responses to “Monday Morning – Pesky Speculator Checkup”

  1. zmann said

    Bolivian impact: PBR, REP, TOT, and RDSA. REP facing striking workers in Argentina as well. I’ll look into possible impacts on these guys a bit but I really don’t think there will be much of a long term financial impact of the sort that can really impact stock prices of these large players.

  2. Hey z,

    Looking at nat, I was wondering what your take on SNG (substitute natural gas) is. Here in Indiana we are looking to open an SNG plant by 2011.
    http://www.expansionmanagement.com/smo/articleviewer/default.asp?cmd=articledetail&articleid=18074&st=5

    To me it seems like a better bet than LNG future going.

  3. zmann said

    Synthetic gas plays go in the same box with gas to liquids and clean coal plays for me. The stocks will generally do well if they can commercialize techniques that work in the lab before they go broke. Management teams are usually an interesting mix of oil man and that guy from Jurassic Park repeatedly saying, “we spared no expense” but many, many, many of them have ended up a penny stocks after oil, gas, or coal has corrected leaving their product uneconomic. Their stocks generally will do well in rising commodity price environment and syn gas in particular has meritn but probably only in a $6 plus environment (and then you’ve got to have access to cheap coal).

    I like guys like Sassol who make the components necessary for the process instead of the guys with the idea as a way to play these since even if it never makes a commercial load they (Sassol) gets paid.

    The other thing about the SYNMs and KFXs of the world is that the option spreads are almost always terrible which makes them playable only with equity in my book.

  4. zmann said

    KFX now EEE. They renamed it after the new CEOs old company. Too funny. Of course, no one knew what KFX stood for anyway and Evergreen does have a nice ring to it for a clean coal company. New management here is top notch but the stock keeps falling so it’ll be one to watch.

  5. Thanks z.

    There has been a lot of talk about coal gasification / clean coal here in Indiana. Kinda looking into it as a hometown thing. Yeah I have noticed that the options spreads on alt energy in general are usually pretty bad.

    -SaneO

  6. zmann said

    Gas back below $8. What, did someone cancel winter?

    Or could it be that traders don’t like that this week’s withdrawal should be smaller than the last one making November 2006 a paltry start to the withdrawal season?

  7. Soccer_F1 said

    Crude down almost 2%, yet CVX and XOM are green again.

  8. zmann said

    Soccer hear ya. It boggles the mind. Another reason I’m staying away but watching closely. Must…fight…temptation…to buy puts…on…majors.

  9. I still think it is funny that gas got above $8 in general… or $7 even.

    I have been out of the oils for about 2 weeks now. Too much funny money for my taste. Every time I wanna buy puts, I have to restrain also, because lately it usually goes the other way :P. Too much frustration for my taste.

    -SaneO

  10. zmann said

    Speaking of frustration, check out LNG (the company) breaking out here for no good reason. Glad I bailed last week and am looking for a new entry but not today.

  11. Yeah you know lower nat prices are good for LNG ( the company ) ?#$!

    -SaneO

  12. zmann said

    Like CRR in here. Started to work last week; coming under pressure now over a production facility delay in Russia that was announced after the close Friday. They’re losing 50 million in market cap over a short delay and a $3-4 million cost over run.

  13. walter said

    Seems that oil stocks are good for daytrading right now- overnight positions are very risky.

  14. zmann said

    Heating degree day (HDD) forecast breaks 200 for week ended Dec 9. First time over 200 this year. Reading is 202 but gas is selling off because of the recent run and the fact that this is 43 FEWER degree days than same week last year.

    November totals were 509 which was only 3 off last year when we pulled 328 Bcf from storage (lots of stuff was down in the GOM due to Katrina so the comparison is not fair at all).

    For the week ended Dec 2 (the last week of November) HDDs came in at 132 vs the 130 predicted a week ago by NOAA- sorry Duckman but they don’t alway miss. I’ll bew going with 25 to 30 Bcf since the mix was a little more skewed to gas heating regions. That leaves us with a November draw of about 60 vs the 328 last year and 10 yr average of 186.

    This mix also has bearish implications for heating oil on Wednesday but not greatly so.

  15. zmann said

    Still fighting the urge to put the majors and so far pretty happy about it with oil down a buck and XOM making its 4 all time new high in as many days. This is also its 7th straight up day. very tempting but NO SALE.

  16. Attacking Mid said

    Well z, I couldn’t wait any longer on a negative SU production report. I dumped all my puts yesterday morning taking a decent profit on SU, a small profit on DVN, and a small loss on HOC. Flipped to SU 80 calls which are up nicely already. Oil was down a buck, but SU kept climbing all day. Looks like another up day coming today for oil stocks.

    One gas stock I just can’t seem to figure out is GSX. I have some money in it, and it’s just been decimated this fall. For some reason it’s starting to show some life again. It moves seemingly uncorrelated with the gas market – odd.

    AM.

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