zman’s Energy Brain

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Which Way Wednesday

Posted by zmann on December 20, 2006

Energy Stocks: The XOI, XNG, and OIH each enjoyed almost perfect 50 retracements of Monday’s losses. Today is critical in establishing whether or not Monday was just flukish profit taking inspired by sector downgrades or the beginning of something more serious (and overdue).

Oil: “Expectations” call for a draw in crude of 1.7 mm bls. If inventories only fall that much I’m finding a hat to eat. With the Houston Ship Channel shut for 3 days during the reporting period (it was shut Monday night the 12th and the report runs through the 15th) and shipments from Opec are off a bit, not as much as they’d like you to have believed but still off (see below), the chances are good it will be bigger than 1.7. As I said on Monday, I think we will continue to trade in the $60 to $64 range through year end.

It’s hard to peg weekly numbers. In late February 2006 the HSC was closed for 2 days over fog and we got a 1.6 mm bls build. My point is a lot of things go into making these numbers up and the guys who get paid lots to do this often get it completely backwards and not always on purpose. Of course there’s always next week when we’ll have 3 days and counting of downtime for the HSC.

HOWEVER, huge numbers at 10:30 (a 3+ mm bls draw on crude or over 1.5 mm bls on distillate) could of course force that test of $65 that I think we need to have and fail before crude can really head lower. Right now we’re stuck here. If they break us out of the band to the upside of $65 (and not just a tick but I mean resoundingly) I won’t have to eat any hats but I will be taking on CALLS WITH TIGHT STOPS in popular, volatile, and highly liquid oil heavy names like CVX, XOM, MRO, SU, VLO, and BHI as a hedge against my belief in gravity and the law of supply and demand (although COP is cheap there’s a reason and it’s gas and it’ll be a drag on the stock if I’m right on that commodity so it’s out).

If we stay below $65, I sit tight on my puts and DD where necessary, mostly likely in MUR and MRO.

Highlights From Opec’s Report On November:

  • Opec delivered 0.65 mm bopd in November less than Oct. The plan called for a cut of 1.2 mm bopd.
  • Non Opec supplies grew 0.9 mm bopd in 2006 and are expected to grow 1.8 mm bopd in 2007 (the highest growth increase since 1994).
  • Chinese demand fell by 1.08 million bopd in October (no Nov # available) to 2.9 mm bopd (that’s what I call volatility!).
  • Venezuela failed to comply with the cuts it pushed for in October. Once a cheater, always a cheater and the news bodes poorly for other member country compliance after they somewhat reluctantly followed the lead of Venezuela and Nigeria.
  • Opec is very worried about demand in 2Q07. Demand naturally slips in 2Q and it coincides next year with several planned project startups of non-Opec fields. They have a cool graph of this on page six of the full report.
  • Opec expects global GDP to decline from 5.1 this year to 4.4% in 2007 with declines in the EU, US, Japan, and OECD.
  • Finally, from the “You Call Yourself An American?” File, I find it interesting that of the US, France, Germany, Italy, UK, the European 16, and Japan only the US saw refinery utilization fall from October to November. There are Cartels out in the public eye and there are cartels formed by the mutual consent of American refiners to slack off.

Natural Gas: What can I say? Gas fell below $7 but then rose on sympathy with the almost completely unrelated commodity of crude oil (which rose because of all those tankers floating about in the GOM). It’s hot and I think gas would have failed to at least $6.80 today were it not for the sugar plum dreams of oil traders. Still, short interest is on the rise, the longs have begun to throw in the towel, and the gas chart and any one of the next 3 weather forecast periods tell you all you need to know.

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25 Responses to “Which Way Wednesday”

  1. non-nonymous said

    Can you explain what the draw in crude mean?

    For the expected draw in crude today what if it is 2 instead of 1.7 ?

    \what if it is 1.3 instead of 1.7?

  2. zmann said

    non-non,

    2.0 would be ok or at least not too bad with oil probably getting a bit of a boost. If it’s that close to consensus on crude than traders will have to look to bigger than expected draws on the products (gasoline and/or heating oil) to drive crude higher.

    1.3 would probably send oil back to the lows seen Monday ($62.60 on Feb crude). Downside will be mitigated by the knowledge that the ship channel remained closed through at least Tuesday. A cold front should get rid of the fog by Thursday,

    man you’re up late…what time is it there?

  3. zmann said

    VLCC rates up $2450 to $61,450. Should start helping the tanker stocks soon. Every rise serves as further evidence that Opec continues to fail to comply with the announced cuts. Go OMM!

  4. non-nonymous said

    Thnks zmann. I am still not clear about :draw in crude”

    I normally sleep early in time for early market time since it opens @ 6:30. I am on PST. I was awake late yesterday almost till 2

    Just a note, I love your website & think you are doing a great job

  5. zmann said

    Oh sorry – draw = withdrawal. build = increase.

    Thanks

  6. draw in crude means how much total crude oil storage will fall in the US ( excluding the SPR )

    -SaneO

  7. oops 😛

  8. These expectations from the analysts are almost always set up for failure.

    -SaneO

  9. zmann said

    MEND – the movement for the emancipation of the nigerian delta is threatening to kill 4 abducted ENI oil workers. What a bunch of jerks. Don’t they have something better to do like send out poorly written email scams. Cowards.

  10. MEND should be called RENT

    RENT = REntable Nigerian Terrorists

    -SaneO

  11. zmann said

    The majors should import them to the US and put them to work during maintenance turns at refineries. They both could use the help.

  12. Attacking Mid said

    Interesting that XOM is solidly down while others like SU and MUR are solidly up. I think “they” know some of us here have puts on the latter names ;^ )

    I doubled up on my SU puts during the post-inventories spike. The stock remains stubbornly strong, however.

    Glad I didn’t buy those MUR puts quite yet – I need to watch that stock for a bit anyway. I don’t like the looks of the chart from a put perspective, as it’s already come down quite a bit and seems to be basing somewhat.

    Am surprised ECA is up strongly today. Perhaps it’s just temporary technical strength due to recent significant declines.

    Overall, I feel good about being in SU and OXY puts right now. If XOM and CVX remain weak, others will likely soon follow.

    AM.

  13. zmann said

    U.S. gasoline supply up 1 mln brls: Energy Dept
    U.S. distillate supply up 1.2 mln brls: Energy Dept
    U.S. crude supply down 6.3 mln brls last week: Energy Dept.

    Analyst estimates are a joke. The builds in products are much more important here than the large “unexpected” draw in crude.

    The stocks traded down hard then sideways. Weather should take back over once everyone absorbs the meaning of refineries returning to production.

  14. It is nice to see refinery util above 90 well just above

    -SaneO

  15. zmann said

    The 4Q estimates for the refiners will be coming down over the next few weeks. Cracks are lower than originally anticipated and maintenance turns had them offline much longer than expected.

    Natural gas is getting canned in sympathy with the build in heating oil. There’s just not much demand for this time of year. Forecasts continue to be mild and it looks like this week is shaping up to be warmer than originally forecast by the CPC.

  16. Yeah our weather forecast here by Chicago was warmer today than earlier this week.

    -SaneO

  17. walter said

    Z, thanks for the updates. It’s nice to see the build in products. Looks like refiners are done for the year!

  18. zmann said

    Walter,

    If by done you mean getting back to work then we’ll see next week. You’ve got 12% of the nation’s refining capacity at the HSC and if the onshore tanks get low (and I have no idea how much is in them at present) then those facilities will start trimming operations back. I’ve seen one announced refining curtailment so far (think it was from VLO for 5,000 bopd (very small)) due to lack of fresh crude supplies.

  19. Attacking Mid said

    Oil has been closing weak mostly as of late – bucking the long trend of panic buying going into the 2:30 close. Impossible to guess which way it will go today. Weakness in VLO and XOM seem to finally be affecting some of the more optimistic stocks like CVX and SU.

    Tempting to start shorting NG stocks, but I don’t have a good track record with them.

    AM.

  20. zmann said

    AM,

    Liking this BTU and LNG (the company) as shorts on gas. It seems to be easier to short coal as a proxy for gas than to short the E&P names who are propped up by the street and largely hedged. ACI looks vulnerable as well.

  21. zmann said

    CNBC says consensus gas withdrawal tomorrow is 62 Bcf

  22. Attacking Mid said

    I have a coal long-term hold that I’m just sitting on wishing I’d never bought it – ANR. I haven’t done any research on coal in over a year, but it sounded promising at the time. Do you think I should dump it and take my beating like a man? It’s one of those holdings that I keep thinking, “It surely can’t go much lower” – dangerous thoughts to an investor, huh?

    Sold some long-term ECA shares today at a small gain. Should have sold ’em a week ago.

    My SU puts are starting to add gains to my portfolio, but OXY seems stuck. MUR finally retreated, but I didn’t take any of those puts.

    Starting to read rumors about potential for SU being acquired by a major (Shell has been mentioned in past rumors). It makes me a bit nervous holding SU puts, as even rumors such as this can cause a stock to jump. I’d like to see SU fall into the low 70’s, then I could primarily trade calls rather than puts.

    AM.

  23. zmann said

    Sorry but don’t know about ANR – the potential for all coals to fall through spring is high

    The whole energy sector is off a bit but it’s like watching paint dry.

  24. zmann said

    AM,

    Like OXY and SU puts here. They had a refinery problem the other day that makes the low end of their 4q target all the more likely. Plus they’ve blown costs with too high natural gas during the quarter. Of course, it’ll just trade with oil, which I think looks lower soon.

    XOI just broke through 1,200 again and may be set for a breakdown. Nice to see (if you’re short) after that 50% retracement on Tuesday.

  25. Soccer_F1 said

    Hugo Chavez a cheater?

    No way, LOL 🙂

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