zman’s Energy Brain

oil, gas, stocks, etc…

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Posted by zmann on December 27, 2006

Wow. Commodities Did In A Day What I Thought Would Take A Week!

  • Natural Gas Gets KO’d – Gas fell $0.52 (7.8%!!!) to $6.11 yesterday and has touched $5.95 in overnight trading so far this morning. A test of and close below $6 is the last major psychological support before prices begin to really tumble. We’re overdue for bit of a bounce so I’d be careful making new bets on the put side while the contract hovers around the $6 mark. However, I am encouraged by the fact that the weakness is not only affecting the front month contract which is approaching expiration. The 12 month strip is within inches of falling into uncharted territory as well.
  • Oil Falls To $60.50 Before Clawing Back Over $61 in a late session effort to end the day down only 2%. Warm weather overrode the fear (or lack thereof) of a response from Iran over the UN sanctions passed last Saturday.
  • Tomorrow we get the oil inventory report and Analysts at Fimat USA are expecting  a decline of 600,000 barrels in crude supplies, along with distillates falling by 150,000 barrels and gasoline showing a drawdown of 100,000 barrels. I would find the small expected decline in crude laughable in light of the HSC being shut for 4 days of the reporting period and the giant 6 mm bls draw we saw last week but these guys are perma bulls and are deliberately setting the bar an inch off the floor. It didn’t work last week but they’ll keep trying.
  • Coal Eased Slightly. Yes I’m starting to watch the dirtiest of commodities a little closer. Coal futures are hanging on to weak support at $41 but could easily tumble 10% if gas soundly breaks $6. I’ll have more on coal in coming week’s as the EIA updates its database.

But Stocks Continue To Tread Water As The Street Continues To Suffer From Denial. The energy sector continues to be analysts’ and portfolio managers’ favorite sector for 2007 despite the fact that: 1) it has risen over 70% in the last 2 years 2) the crude oil markets are currently oversupplied by 2.5 to 3.0 mmbls/day, 3) the US and many industrialized nation economies are slated to see slower growth next year, 4) near record inventories of natural gas in the US, 5) unsustainable growth (in the words of the majors and E&P companies) in service costs, and 6) CFPS estimates are lower for 2007 than 2006 for most companies due not only to lower assumed commodity prices but also higher expenses (again) and anemic production growth on the part of Big Oil.

Crack Spreads Get Cracked – The continued warm weather combined with last week’s unexpected build in gasoline served to drive product prices much lower. Just looking at the week over week comparison (Tuesday this week to Tuesday last week) gasoline and heating oil prices fell $0.09 and $0.13 respectively. Oil fell $1.70 for the period leaving the 3-2-1 crack spread off a whopping 33% on the week (from $8.32 per barrel to $5.54). Ouch. Not good for the refiners. This is supposed to be the strongest seasonal period for heating oil prices but instead it looks like a black diamond run with no end.

Analyst Watch: All Quiet On The Analyst Front. Nothing yesterday but you have to admit that it was a good to just sleep in if you’re an energy bull! So far today…nada.

Tanker Rates Continue To Hold $61K/day. A strong indication that Opec is not increasing compliance to it’s already announced cuts. Several of these stocks fell as rates tumbled to $38K/day prior to Opec’s last meeting but failed to recover as rates nearly doubled in its wake. I’ll be doing some valuation work this week on this but will take my time buying as they continue to get caught up (down?) in sector downdrafts.

Iran Watch:

  • Iran is having difficulty financing oil infrastructure needed to maintain and/or increase production because foreign investors are increasingly reluctant to deal with the country’s harsh project terms (small working interests, not allowed to operate, good chance of them stealing it from you).
  • Iran’s parliament has voted to urge the government to “revise” ties with the UN nuclear agency in a move designed to reduce the country’s co-operation with the international atomic authority. Anywhere else the legislative body would be urging their president to act with some measure of caution towards the UN , but not in Iran, on no! You can almost here the Israelis warming up their afterburners.

Odds and Ends:

Toyota and Ford are rumored to be thinking about tying the knot. I applaud any effort that gets an American car company focused on fuel efficiency and not commercials set to country music appealing to some misguided sense of “buy American” nostalgia. Big 3 autos are largely made from parts in foreign countries so the idea that you’re buying an American car is less true than you are supporting inflation in the American health-care system but I digress. The battle to stretch our resources must be fought not only through improved recovery but also through conservation.

REP may lose half it’s Bolivian gas reserves due to recent government “restructuring” of oil and gas contracts.  Wide spreads, difficult to get put executed in between due to lack of liquidity.

13 Responses to “Wednesday”

  1. non-nonymous said

    apc …looks very bullish

  2. zmann said

    It’s up this morning as the local papers in Houston and Dallas cite how each company got the better end of the deal. I think it was a great price for the APC assets, well above what the company as a whole is being valued at on a $/mcfe basis and only slightly below the prices APC paid for the combined KMG and western deal.

    However, I still don’t get too excited about it if gas falls out of bed which it may do this week. You may get the opportunity to buy it lower. I’m not playing it either way right now.

  3. non-nonymous said

    hhmmm..i should havr been clear, I hold puts on it. mabe sell my puts?

  4. zmann said

    EEE up big in pre market over contracts signed with utilities to “advance the integration” of K-direct refineries. Doesn’t say they’re buying these refineries. No economics mentioned. Typical of this company to throw out a lot of semi-meaningless phrases and drive their stock price up. Not buying those calls on this yet although someone obviously got word of this a week ago when the stock popped 20% on no news. Nice.

  5. zmann said

    dpends on how short term they are. the stock is down a lot from its recent highs and it’s cheap on forward earnings so it may hold up better than others for next few days, which can really hurt the Januaries. However, those earnings are suspect if gas starts heading for $5 and oil heads toward $55 which I think its doing.

  6. Attacking Mid said

    It must be tough being a journalist. Imagine your boss saying to you, “Put out an article right away titled, ‘Oil stocks rise due to ________ ‘”

    DVN really taking it on the chin the past few days. I sold my puts in case it bounces back. SU is the energizer bunny of oil stocks. Luckily I was able to sell my calls at a nice profit this morning, protecting yesterday morning’s gains on the puts.

    I think there’s more for these stocks to go down.


  7. Attacking Mid said

    I guess zmann’s at the dogpound today. I’m loading back up on oil puts. The stocks are going up on almost no volume and only because most other categories are up today.

    I’m beginning to wonder if we won’t see some significant selling starting Jan 2 as investors rebalance their portfolios to reduce energy stock overweightings. If investors have decent gains, they may be reluctant to incur the taxable event until 2007.


  8. zmann said

    I’m here…just a bit preturbed.

    Oil down $0.50, gas down $0.20 and the stocks are off to the races.

    I’m standing pat for now but looking for some bargains. Sopmebody said the other day that XOM can rule these low volume days no matter what the commodities do because of the size of their buyback. True, and a lot of people make buy decisions on the group based on what XOM’s up to and since they buy no matter what those people jump in as well.

    Unlike the DJIA this buying isn’t pushing the sector into record territory and the XNG and OIH are still starting to form a new downtrend below their moving averages. The XOI could pop higher here but I don’t think much unless the commodities get a big bounce off inventories tomorrow.

  9. Attacking Mid said

    What in the world happened to UPL….. other than the fact that I bought puts on it today – way too early.


  10. zmann said

    Search me. Why is any of this stuff up so much. Crude is now down $0.73 to $60.30 and gas is off another $0.27 to $5.84. Last week I was hoping for a test of $6.50 and gas is already $0.75 below that level.

    The sector is just getting dragged up. First down day on the DJIA, unless it’s caused by a sharp spike in crude, should give us a pretty hard reversal on the group. In the meantime I’m catching up on some paperwork and trying not to watch the minute charts.

  11. thumb said

    Low volumes makes it easy to control the market.


    Tanker rates for q 4 sucked vs 2005– id short nat and dht which are bother overpriced

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