zman’s Energy Brain

oil, gas, stocks, etc…

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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.

17 Responses to “Tuesday Morning – Please Play It Again Sam”

  1. Attacking Mid said

    Wow, tricky trading in the oil patch these days. Might be a good time to put on some straddles, as it’s just so hard to consistently guess correctly which way the oil stocks are going to go.

    For the speculative part of your portfolio, it might be wise to start accumulating some shares of BQI. They are currently ramping up their winter drilling program (exploratory), and if they are able to confirm half of what they expect to find, this stock could double in the next couple of months. If you can buy it under $4.50, I think it will have limited downside. As resources are confirmed, I expect to see JV partners lining up at the door effectively lowering the speculative nature of the stock.


  2. zmann said

    Thanks for the tip on BQI but I generally stay away from the single digit midgits unless I know management. I’ll look these guys over though.

    Straddles not a bad idea in here although I think we put in a pretty good top Friday and we have another 5-10% downside in the near term. As I said I’m neutral to bearish so I’ll be adding to positions if they get mini-bounces today and thinking about new ones on SU and MRO. I think Phil is using his VLO rule to justify lightening up on this bounce which may be the safer play

    Anyway, I check out BQI and Teton (something Gunga suggested last week and get back later)

  3. zmann said

    FBR just cut price targets on a whole slew of refiners, majors and mini majors (MUR). Looks like its based on a slight reduction in their 2007 oil price deck announced yesterday. Think that’s Fidel Gheit (sp?), very smart guy on the Street.

  4. zmann said

    This would be a new low close for EEE – volume looks like retail holders giving up (pretty rare to see more than a 1,000 shares trade).

  5. zmann said

    Doing a little work on coal today but these charts really say it all:

    warning: PDF

    Click to access nymex_chart.pdf

  6. zmann said

    Schedule of Arrivals in Houston Ship Channel

    This is updated daily and I see some tanker names scheduled to be in port tomorrow. Oil may do a “buy the rumor, sell the news” as this fog delay goes away.

  7. gungagalonga said

    Z- Teton Energy was just a spec play I’m watching. They don’t operate (yet), but have non-op working interest in some decent emerging plays. The operators are reasonably reputable and big enough to keep the bit turning during volatile times.

    They have good PUD visibility through low risk activity.

    To me, if it works, they seem like the classic “build up the assets and sell” model.

    Price is the main risk here, as they are in the Rockies which has been hit harder than other areas on NG spot pricing.

  8. zmann said

    Gunga – it’s best to not operate or produce anything as long as you can get away with it. Once you produce something people just expect you to produce more and more and before you know it it’s “just work, work, work all the time”

  9. zmann said

    SJT announced it’s monthly distribution of $0.097 per unit. I’m going to have to build a model on this one. There gas prices really stunk ($3.68 / mcf in Oct, down from almost $6 in Sept). It’s up today as everybody know nobody wants Rockies gas and I guess production looked OK.

  10. gungagalonga said

    Fortunately, I am not the real Gungagalonga.

    The real Gunga has been comfortably retired since college and is living like a King in the Texas hill country…

  11. non-nonymous said

    XOM trailing both vlo & OIH. Hopefully will go to 80-85 by end of Jan

  12. zmann said

    non-non. That we be about right for it sense none of it’s upward move so far has been justified either.

  13. zmann said

    MUR not getting much love like the other stocks on this oil rebound. When oil comes in, look for MUR to punch soundly through $50.

  14. Attacking Mid said

    MUR options are available in $2.50 increments…. nice. I may buy a few puts just on your rec.

    I rode my SU calls up to the HOD, sold, and am flipping to puts. I only broke even on the calls as I had to dump half yesterday at a loss due to being over-committed (I have a really bad habit of doing that).

    OXY is also not getting much love. I sold a bunch of puts yesterday, but waaaayyyy too early. I’m buying ’em back today, as the stock is acting weak.


  15. Attacking Mid said

    I also will take a longer look at TEC (Teton). I looked at the Yahoo Finance site and it caught my attention that David Dreman owns some of it. He’s a talented stock picker in the mutual fund industry.

    Thanks for the tip, Gunga and Z.


  16. zmann said

    I stepped out for some Xmas shopping and little EEE took off 16%. What in the world?!? Just can’t take you eyes off those guys. Volume was double so they probably have a leak on an upcoming PR. If it’s fluff then I’ll be DD in the am.

  17. Jon said

    Do you think EEE went up to follow SYNM? SSL also gained a bit, but I’m surprised RTK did nothing.

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