Tuesday Morning – Please Play It Again Sam
Posted by zmann on December 19, 2006
What a beautiful day in the neighborhood. If you’re short that is. The energy indexes each pulled back significantly Monday. We’re no where near correction territory mind you as the following table indicates.
The charts looked pretty extended and now look in danger of minor breakdowns. I’m far from being a TA wizard but these charts look pretty hairy to me.
Analyst Watch: APC, DVN, and NBL from buy to hold at Citigroup. KBR picked up with it’s first rating since spinning out of HAL – a buy at Stiffel.
Oil: No surprises in terms of production problems or rebels and warm weather are letting oil continue to slide.
Natural Gas: With the $7 mark less than a dime away as of yesterday’s close we should get a more deliberate test of it today (we’re down to $6.97 in electronic trading this morning). Any rally associated with the halo effect from heating oil and the ship channel problems (see below) should be fleeting if they materialize at all. December looks like a complete bust for gas demand. Yippee Skippee. This is a chart even the traders can’t love and they love almost everything these days.
Opec on Monday said fundamentals of the world oil market shows signs of weakening in 2007 as economic growth slows and supply from non-Opec countries rises faster than global demand. “Risks for oil demand appear to be more weighed to the downside, given the dangers to global economic growth emanating from a visibly weakening US economy,” the oil cartel said in its monthly report. Opec’s economists expect producers from outside the group to produce 1.8 million barrels per day (bpd) more crude in 2007. This is 100,000 bopd higher than in comments Opec made last week. Too bad they can’t get Russia and Brazil to join.
Houston Ship Channel has been shut in for 5 days with fog. 60 tankers await unloading. The region accounts for 12% of US refining capacity and I’ve seen one report of reduced throughput due to the delayed unloadings. This should set up some pretty sizable withdrawal expectations for this week and next for gasoline and heating oil.
Sentiment: I remain bearish on natural gas and oil and neutral with bearish leanings on the stocks. I’d be more bearish but until yesterday the street found nothing wrong with skyrocketing costs, flattening revenues, and a declining commodity price deck. Sadly, I will become less timid about shorting as the stocks come in (if they continue to which I feel is likely). The mantra among gas traders has become “if only we could get a normal winter”. My response is too bad. Prices are up five fold in five years and we’ve never, let me repeat, never had this much gas in storage this late in the game. How we’re over $7 is a complete mystery to met. Maybe it has something to do with the skyrocketing open interest at the CFTC.
Natural Gas Traders have become decided less bullish. As seen below the speculative component of natural gas trading has become decidedly more neutral (at least a lot less bullish) in the last few weeks. The net long position (longs – shorts) reached a peak this year of 49,716 contracts (almost an all time record) in early October. It has now fallen to 15,400 having been cut in half from the first week in December. As I stated in October and November, peaks like the one in October seldom last long and reversal can lead to a sharp reversal in the underlying commodity (nat gas).
And hear you have it:
New Positions: On the put side I took new positions in PBW, MUR, BTU, still like the EEE puts through year end but then plan to go long. As a hedge I took a starting call position in OMM. If I’m right and compliance is weak among Opec members VLCC rates should stabilize above the $50K/day mark. It’s a double play really for if true, we remain awash in oil hurting pricing for all the oil putter plays.