zman’s Energy Brain

oil, gas, stocks, etc…

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Archive for December 14th, 2006

Thursday – Opec, Gas Inventories

Posted by zmann on December 14, 2006

Opec Meets Today. And there are lots of mixed signals floating around:

Saudi – “The fundamentals of the market are much better than they were in October,” he said, adding: “We probably have a little work to do to make it an even better, more stable market.”

* – $60 oil seems fair to both sides

* Libya – “I don’t think there will be any cut,” the head of Libya’s delegation

* Iran – $70 oil and Israel must be wiped out

* Angola – glad to be a member, where’s the keg?

* Sudan & Ecuador – let us in, let us in!

The latest “official” word seems to be a 500,000 bopd cut delayed until Feb 1. Talk about less than zero. Oil is up around $1 on the news. This is the perfect announcement for the cartel. It sounds like you’re taking action but actually it’s just a threat of taking action if prices don’t hold $60.

Natural Gas Inventory Day: The First Of The Winter Withdrawals. Today we get the first of the 100 Bcf withdrawals from storage of the season. We scored 215 degrees last week, well above normal and year ago levels so there’s no way around a big number this morning. Of course, the forecast shows us tumbling all the way back to 144 this week (next week’s storage activity) and the week after that looks even warmer so any rally will be (should be) fleeting. Prime demand time is being wasted for much of the US.

Analyst Watch: VLO – buy to hold at Deutsche.

A word on gas well economics. People have said that gas will never go below $5 again because everything has changed in the gas industry since 1999 and poor E&P companies can’t drill a well for less than that. Put the cup down. Stop drinking the industries cool-aid. Here’s a recent, very common example of how wrong that is. Let’s take a shale well- lots of growth coming from those these days (CHK, DVN, EOG, APC, SWN etc, etc):

  • One Fayetteville Shales well – average reserves 1.5 Bcf – at $5 /Mcf held flat into the future the revenues off such a well would be $7.5 million.
  • SWN drills them for $2.2 million apiece.
  • This trend is less developed than its big brother the Barnett so it costs more to gather and process the gas and workers are more scare but these are hardly marginal economics — and that’s at $5 gas. Not the 12 months strip’s $8.
  • Yet this is what other big players in the industry are telling you. The play is not profitable for them and only marginally economic. Please. Cry me a river.

Recent Moves: Picked up a little APC 45 December put action on the suspicion that any commodity weakness will hurt these guys after the scathing comments from Goldman Sachs yesterday. Also bought SU 80 puts on the expectation of BRSN action regarding Opec and BHI 75s for same and the fact that the OIH looks overheated to me – what exactly is the catalyst for this recent move higher? I know it could easily pop into the high 150s but the service guys are starting to face some pricing pushback (something they haven’t seen in years). Finally, picked up the Jan 7.50 P s on EEE and am looking to pick up the long side of the trade (March 10 Calls) around year end.

Another word about oil. The following data is “unmassaged”, straight from the EIA. I download it and then put it in chart formats that are more user friendly than a line that begins at the beginning of time and runs to present. All in all, supplies are adequate if not plentiful. Given that Opec has excess supply and IEA just moderated its forecast for Chinese growth I’d call the present situation mildly bearish.

1) There is a lot of crude in storage at present…

crude-history.JPG

2) … But more important is how much is in storage compared to other years at this time of the year. This is the same data stretched over 52 weeks of the year. Crude inventories are clearly above the mid point of the range.

52-week-crude.JPG

3) Gasoline history – also relatively high just looking at a long term chart of gasoline

gasoline-history.JPG

4) …but the 52 week chart reveals the impact of refinery outages. Gasoline inventories have made a relatively quick transition from somewhat oversupplied to somewhat under-supplied. Good for gasoline prices but not indicative of true supply and demand. Given the abundant supplies of crude on hand this situation can be quickly reversed once refineries decide to start operating again.

gasoline-52.JPG

5) The long term Distillate history chart also shows relatively high stocks

dist-hist-2.JPG

6) But the 52 week chart shows the bounce off record (for that week in time) storage and the impact that low refinery utilization and secondary and tertiary demand has had.

dist-hist.JPG

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