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 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).
- US detains Iranian diplomats in Iraq. The four are suspected of aiding Iraqi insurgents.
- 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.