zman’s Energy Brain

oil, gas, stocks, etc…

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Archive for January, 2007

Wednesday – Oil Inventory Day + A Word About Costs

Posted by zmann on January 31, 2007

Oil & Gas Shot The Moon Yesterday. More forecasts of cold lingering through the first 10 days of February combined with stories that VLO‘s damaged catalytic cracker in Texas City will be down for repairs for 3 weeks (67,500 bopd) and Saudi Arabia’s announcement that it was cutting production again on February 1st sent oil and gas higher. Much higher. This morning you’ve got a little profit taking on both oil and gas but we probably need to go ahead and get $60 oil and $8 gas out of the trader’s systems before we resume a path back to $50 and $6.

  • Natural gas rocketed $0.72, 10% to close the day at $7.66. Only a day after traders shrugged off the cold weather and sent gas below $7, they reversed course and drove the March contract to a two month high. Maybe they saw my post regarding the coming two 200 ish Bcf withdrawals. Gas is now much more likely to test $8 before $7 or my $6 or $5 targets for Spring. However, I still think the move is overdone at this point.
  • Oil rose $2.93 to $56.94 and broke it’s down trend. Although we’re getting a little profit taking this morning everything hinges on news and technicals. Yesterday’s breakout opened up a run on $60 that I think must be fulfilled before moving lower on the reality of a fundamental over-supplied market. It’s going to take more than a couple of weeks of heating oil withdrawals to erode the current heating surplus.

Consensus estimates for today’s inventory report are:

  • Crude: Up 1.2 mm barrels.
  • Gasoline: Up 1.6 mm barrels. I wouldn’t be surprised to see a noticeably bigger build here.
  • Distillate: Down 2.6 mm barrels. This would be the first drawdown in inventories in the last 6 weeks but it would leave inventories ABOVE the upper end of the historic inventory band for this time of year.
  • Refinery Utilization: Down 0.1% to 87.3%

Opec Watch: Russia says NYET to Iranian “Gas Opec” proposal. In the immortal words of Nelson, “Ha, Ha.”

Holdings Watch: As I said earlier in the week, I’m sitting tight on my foothold put positions (many of which turned into toeholds during yesterday’s commodity spike). I sleep well at night because:

  • 1) for the most part they are one fifth of my anticipated ultimate position,
  • 2) I’m not in the February contracts (except for EOG and BTU which are tiny holdover positions I miss timed) and HES which was an all or nothing earnings play, and
  • 3) the fundamentals haven’t changed and this run up will soon yield to profit taking.

With the preponderance of Major and E&P 4Q numbers still ahead of us and a rally into those number (albeit on rather weak volume) I’m reserving additions and subtractions to the portfolio for Thursday or later. I am being very cautious on new opening new positions, long or short right now. The old adage about the “market remaining irrational longer than you can remain solvent” can not be taken too seriously. While I know business has gotten more expensive for the companies I track and oil has come down significantly the fact of the matter is that the sector is still hot and trying to rekindle. I’d rather wait two weeks and short them from a higher level.

HES Reports In Line 4Q. $1.13 vs $1.13 expected.

  • Production jumped 16% YoY from 316 m boepd to 366 mm boepd. (up 4% sequentially). US production continues to decline as expected and the growth came from Africa (oil), and Europe and Asia (gas).
  • I’d point out that growth is good but a barrel of oil in the US is not a barrel of oil somewhere else (same goes for an Mcf of gas for that matter). African differential for oil was $3.87 per barrel ($49.77 vs US of $53.64) due to the effects of lingering bad hedges and European and Asian gas garnered prices of $0.72 and $1.88 below US prices respectively.
  • Lower margins in both refining and marketing cut R&M segment earnings from $229 mm in 4Q05 to $67 mm in 4Q06.
  • E&P segment earnings jumped from $298 mm to $350 mm on higher production and high oil prices (lousy hedges from 2005 are gone now).
  • Costs continue to rise on a per unit basis: Lease operating costs rose 16% in 2006 to $9.54 per BOE while G&A per BOE shot up 23% to $3.59 per BOE.
  • Meanwhile, as you’d expect with a company trading at it’s all time high who just met (and didn’t exceed) substantially reduced numbers they’re pushing the stock to even greater heights in pre-market trading.

A Little Research While I’m Waiting On “Rationality” To Return. I often say costs have gone up a lot for the producers of oil and gas and that that will either lead to a crunch in a lower commodity price environment or a fall off in service contractor’s rates. I’m not picking on any of these companies right now but am just doing a little quantifying of what it is I mean when I say that costs higher.

Lease Operating Expenses (the cost of producing the oil and gas) Have Surged In Recent Years. This shouldn’t be a surprise since it’s what’s behind the growth in Oil Service company earnings. The table is a measurement of the cost in dollars per barrel of oil equivalent ($/BOE) required to produce oil and gas. A BOE is determined by using the ratio of one barrel of oil or NGLs to six Mcf of gas.

loe-lc-ep.JPG

When you add production taxes and gathering expenses, costs have grown even more.

loe-plus-p-tax-plus-gathering.JPG

Finally, you’ve gotta pay your workers. General and administrative costs are up but not uniformly so (you guys at EOG and Devon need to complain)

ga-per-boe.JPG

Add all that up and you’ve got per unit costs up 36% between 2003 and 2005. This jumps to 59% when you include the most recent nine month period. While this average is somewhat skewed by the impact of higher costs at APC which will undoubtedly come down as higher cost assets are pared off. Still the following table shows only EOG managed to trim op costs this year (via higher production). Note: the table below is a little fat for this page but you can see the entire table when click on it.

op-costs-per-boe.JPG

Talk about inflation! If oil and gas prices settle down somewhere near current levels it seems obvious that service costs, while they might not come down, will certainly lose their momentum…as will the earnings of the OIH companes.

Posted in Uncategorized | 21 Comments »

Testy Tuesday

Posted by zmann on January 30, 2007

Oil Backs Off: Saudi Arabia’s apparent lack of concern over oil’s recent declines slapped crude prices yesterday. If the Saudis decide to set what they consider to be a fair price at roughly current levels this will muffle/neuter the most vocal (also the most prone to cheat) cartel members.

Opec Watch: In Venezuela, the Collective Junta of Workers in the Orinoco Oil Belt for the Socialist Vanguard (CJWOOBSV???!!!), a pro Venezuelan government oil worker group whose acronym is undoubtedly pronounced just like it is spelled, is reporting that XOM has rebuffed the country’s efforts to nationalize their joint Cerro-Negro extra heavy oil project in the Orinoco Basin. No comment from Exxon but it wouldn’t be the first time they’ve told Hugo to pound sand. This could lend support to oil prices if XOM decides to shut everything down and take Chavez to the Hague instead of just cooperating and taking less money from the project.

Putin Watch: Russia to expand ties with Iran. Nothing says please support our ideology like a fresh stack of Euros. Moscow is going to get all the good engineering contracts that we won’t let SGR and the like have anyway.

Nigeria Watch: Good Reuters story on Umaru Yar’Adua, currently a regional governor likely to be Nigeria’s next president. Elections are in April and it promises to be interesting/volatile. The opposition candidate is a former military dictator.

Earnings Watch: SII – in line fourth quarter at $0.71, in line expectations with $3 number for 2007. WFT – slight beat. More on these two later.

Natural Gas pulled back below $7 today despite new forecasts calling for bitterly cold weather through the next two weeks. It’s possible gas’ retreat is attributable to 1) a reaction to the drop in gas rigs I delineated in yesterday’s column (which I know is sort of the tail wagging the dog but it happens, trust me), and 2) a bit of profit taking and repositioning after a week of short covering. Looking ahead:

  • It was colder than originally anticipated last week… The heating degree days (HDDs) for the week came in at 224, slightly colder than the early read of 219 and I would’nt be at all surprised to see a 200 Bcf draw when inventories for last week are reported this Thursday.
  • …And this week will see the coldest weather of the season to date.This week’s advance tally on HDDs is a whopping 238 (Ok not really whopping, just about normal for this time of year actually). We’re probably looking at a draw of 200-210 Bcf vs 5 year average draws for this week in history of 166 Bf.
  • So if we get withdrawals of 200 Bcf this Thursday and 210 Bcf next week where does that leave us at the end of January? 20 Bcf shy of all time high storage territory for the end of January, that’s where.
  • I expect a bumpy ride this week for gas as people refocus on just how cold the data says this week is going to be. Potential long side quick trades are EOG (which I still have puts on but may hedge this week), SWN, CHK, and APC. More on gas Thursday.

Analyst Watch: Bear Stearns upgrades TSO (talk about a day late and $10 short!)

TSO Had A Blowout, Best In Show Quarter Yesterday. No stock is changing hands on the acquisition of a west coast Shell refinery and several hundred service stations and I’m told accretion amounts to 20% in 2007. Debt to cap will be under 50% after the deal and I’m holding off on taking action here until the shine where’s off a bit.

Holdings Watch: I’m pretty content with my March opening puts (opening generally being about a fifth of what I’d ultimately like to hold in terms of contracts) in BP, SLB, EOG, and BHI.

Odds & Ends

XOM Drilling In The Barnett Shale. They been working with Harding Co., a local private oil and gas company and single digit midget PTSG, for about a year gathering leases and drilling wells through their DDJET venture. XOM acts as operator in a five county area around Ft Worth. The strange thing is that Exxon doesn’t do much domestic exploration/exploitation of anything in this size range. It’s just too small. They had infrastructure so that makes some sense and this could be part of a campaign to look like they’re doing something green at home but unless its scalable it won’t make a dent (bump) in their financials. It does make me nervous about shorting a company like DVN who acquired their way into the Barnett when they picked Mitchell back in the play’s nascentcy or even EOG or COP who are big in the area.

Posted in Uncategorized | 14 Comments »

Monday Morning – Busy Week Ahead

Posted by zmann on January 29, 2007

Oil: Last week oil saw it’s first two consecutive days of gains this year and was up $2.02 on the week to close at $55.42. The small recovery was attributed to continued cold weather and reports on Friday that at least Saudi Arabia is complying with agreed upon Opec production cuts even as the smaller players continue to cheat. An unexpected build in heating oil inventories yielded a brief setback to the bulls but they quickly reversed directions and closed the week at its highest level.

This morning oil is off $0.50 in pre market trading. The election of a Muslim to the Israeli cabinet isn’t exactly the same as world peace breaking out but it could be seen as helping to ameliorate recent mounting tensions in the immediate vicinity. Of course, the early morning moves mean little and it’s possible that ever increasing tensions in a place like Nigeria may override the 15 minutes of Kumbaya being displayed by the Knesset.

Opec Watch: Very quiet other than a retread story about Saudi attempting to stabilize prices At $50 (Opec Basket) or roughly $55 NYMEX. See story here.

Nigeria Watch: Militia storm police station and  exchange gun fire with police.  I especially like the part about various militias being funded by rival politicians. Just another day in paradise.

Natural Gas: Gas is holding up pretty well considering this is the most gas we’ve ever had in storage during this week of the year. Click here for more detail on gas storage. Gas traders regained their sanity for one day last week, the only day they had to think about the fundamentals because actual data came out, but then resumed their “keep gas > $7″ campaign. This support is weather based and won’t last long…winter has about 10 weeks left but the first winter relief trend usually arrives in February and that will serve to ease prices. The trick for traders is to smoothly transition from”I think it’s going to snow this weekend” to “have you seen how hot this year is going to be” as they email equity analysts pictures of mountain sized chucks of ice calving off the polar sheets.

The latest weather forecasts call for continued cold in the northeast and a chance for a “plow-able snow event” across the Central Plains to the Great Lakes around week’s end.

It’s Still Pretty Cold…

still-cold.JPG

…But It Won’t Last Long.

getting-warmer.JPG

Rig Counts Were Off A Touch Last Week And This May Be The Start Of Reduced Activity. According to Baker Hughes the number of US rigs turning to the right last week fell 46 to 1,699. Of those:

  • 45 were land based rigs,
  • 20 were drilling for oil,
  • 26 were drilling for natural gas – this was the second largest drop (in shear gas rigs) in the last 12 months. However, it comes on the heals of some recent large rig adds so maybe it’s just a coincidence. Maybe it’s the inclement weather.  It definitely bears watching.
  • Over half the loss in rig count was attributable to Texas and Louisiana, and
  • Drilling activity in three major states is now DOWN vs year ago levels (AK, NM, and WY). LA and CA are barely above year ago levels while Texas continues to be busy with rig counts over 20% above year ago levels – mostly due to Barnett Shale activity.

gas-rigs-012807.JPG

The jury is still out on whether or not the recent statements from Majors and E&Ps alike regarding reduced capital expenditures in 2007 will result in an actual decline in rigs. For oil counts the slowdown is already well under way.

1-year-oil-rig-yoy-comp.JPG

However, as the old adage goes “oil is global, gas is local” and the local price of gas has been holding up a lot better of late than that of oil. For that matter it’s been holding up a lot better than you’d think given the high levels of gas storage but I’ll spare you a rant on gas prices until later in the week. Suffice it to say that as soon as it starts to warm up in the northeast traders goggles will come off and gas will retest $6. At that point the year over year comparison of gas rig counts should start to look like the one for oil above. And then we’re back to that high correlation between the XNG and rig counts I mentioned earlier. Not to mention the impact this will have on the OIH, which strangely, has not fared nearly as well as the oil and gas producers.

And Now For Something Completely Bearish: LNG Expected To Rise In 2007, 2008. Over the last three years, LNG shipments into the US have fallen off as the global LNG market has become more competitive. The EIA just released a report forecasting a reversal of this trend. EIA is calling for mid 30% growth in shipments to occur in 2007 and again in 2008. As seen in the chart below that amounts to an increase in gas supplies of 210 Bcf this year to reach 770 Bcf and an additional 310 Bcf in 2008 to reach 1,080. An additional 500+ Bcf in just two years can’t be positive for gas prices in a market where demand growth typically only runs between 1 and 3%.

lng-eia.JPG

Analyst Watch: HAL – RBC maintained its outperform rating but slashed their price target from $50 to $36 in an attempt to get it a little more in line with the universe. I don’t like price targets because they are static and get stale if the stocks move against you. He should have changed his rating long ago but he, like many other energy analysts, has been is a long term state of denial.

Earnings I Care About This Week:

  • Monday – TSO – the most insulated of the refineries reports first. Given recent price action this needs to be a pretty positive call and a beat.
  • Tuesday – SII, WFT, – bits, mud, other services – check to see if their comments are as rosy as those from HAL and SLB last week.
  • Wednesday – HES – first of the mini-majors to report…could set the tone for MRO and MUR.
  • Thursday – AGU – big fertilizer company – their #1 cost is natural gas so they usually have some interesting things to say about it. APA – first to report of the big cap oil E&Ps. CRR- these guys make propants (basically manmade ceramic sand) used to hydraulicly frac wells. There aren’t a lot of wells being drilled these days that don’t get fracced so what these guys say about demand is pretty important. EOG – first of the big cap gassy names and one I have puts on now so of course I’ll be paying attention. XOM – listen for buyback information…I’m betting they’ll be forced to say it’s going to shrink. MUR – need I say more. PDC – driller, again watching for forward cautionary tone. VLO – will the day never end?
  • Friday – ACI – people who report on Fridays are generally hoping no one notices. I’m only half kidding. Analysts have gotten very bullish on the coals over the last two weeks so we’ll see if Arch supports the newly brightened outlooks.

The Week Ahead: See last week’s picks here. That is not a copout because: 1) Movement in that list was negligible and the same principals/logic/thought processes still apply and 2) I applaud the reader if you made it this far. As far new picks go I’m sitting out through Thursday. As you can see above, Thursday is undoubtedly the most important day of the quarter for earnings. Any bet I make before the numbers and the conference calls would simply be that, a bet. Of course, I reserve the right to change my mind taking action on say, VLO due to TSO‘s comments, etc.

Have a great week and as always, thanks for reading!

Posted in Uncategorized | 22 Comments »

Friday Morning – Volatile Week & No Help For The Fundamentals

Posted by zmann on January 25, 2007

Natural Gas Inventory Report: 179 Bcf withdrawal vs my 165 Bcf. But like I said yesterday, you needed a REALLY BIG NUMBER to support gas at $7.50. Apparently that wasn’t it. Gas fell $0.52 to $6.90. Don’t forget the February contract falls off the board next Monday which, combined with the recent jump from $6 to $7.50, may exacerbate the decline. To get away from the effects of contract expiry I’m now watching the March contract, now at $6.91, and I’d have to say that we are in for a test of $6.19, the lowest level March 2007 contracts have ever traded at, by next Friday.

Where we stand on storage:

  • Storage as of January 19, 2007: 2,757 Bcf
  • Max storage for this week in history: 2,494 Bcf (2006)
  • We remain 10% above year ago storage levels and a whopping 21% (472 Bcf!!!) above the 5 year average. One minorly bullish point (very minor) is that the trajectory of the surplus to last year is declining on the recent cold weather spell and this could continue through mid February.
  • The average withdrawal for January is 563 Bcf with a range of 436 to 810 Bcf. I think the recent cold snap could make up for the smallish withdrawals at the beginning of the month and approach or slightly exceed the 563 number.
  • 10 Weeks of Winter Remain (Roughly) And The Coldest Ever Such Period Saw Withdrawals of 1,280 Bcf. A repeat of that would still leave 1,477 Bcf in storage at the end of March.
  • That’s well above the 5 yr average trough level storage (end of March) of 1,025 Bcf (excluding 2006’s warm and Katrina impacted levels). However, yesterday’s withdrawal was by no means the largest in history for that particular weak so if we’re going to see that coldest of all winter withdrawals in the remain time frame it’s going to have to get colder and stay cold through March.

gas-storage-012507.JPG

To illustrate that last rather long winded paragraph more clearly please peruse this historical depiction of gas withdrawals in the final 10 weeks of winter.

last-10-weeks-demand.JPG

…and then please examine this history of annual trough storage levels. Note the high / low for 2007 is well above the mean trough level.

trough-storage-012507.JPG

The blue bar above represents the worst case for gas storage levels before the injection season begins (if history has anything to say about it that is)

Oil Fell Below $55 As The Phrase, “Wait a minute, 2027 Is 20 YEARS Away!” Echoed About The NYMEX Crude Pit. The “Bodman Show” Rally on Tuesday was just silly and the follow through that turned a blind eye on Wednesday to another set of blatantly bearish numbers finally ran out of steam today. Conviction really failed when March crude crossed $55 and selling continued through the Nymex close with the contract ending down $1.14 to $54.23.

Oil’s Cooked. The trend is not your friend. Here we have a 2 year chart the USO ETF, a proxy for WTI. Although USO has been trading since April of 2006 volume has recently accelerated on oil’s decline and the ETF’s recent secondary. I’m not a technician but that’s an ugly supported by pretty bad fundamentals.

long-term-uso.JPG

And This Is The Index Of 15 Big Oil Companies Whose Top and Bottom Lines Depend on the Price of the Above.

long-term-xoi.JPG

The two look pretty similar through October 2005 but then oil flattened out and began falling while oil stocks, supported by seemingly low trailing valuations and a skyrocket the size of California’s GDP with which to fund buybacks, continued to move higher. At some point either oil has to go up or the stocks must come down. On a forward basis they are no longer cheap. Again, I’m a fundie guy but even I can see a chart that’s running out of steam and that to me is exactly what the XOI looks like now. I can also tell you that only chart more parabolic than the XOI chart above is one of service and drilling costs which has shot the moon. So if what you sell is sucking wind and the cost of getting it out of the ground is has been rising exponential what does that say about the out year’s earnings?

Holdings Watch: No new bets today. Just watching the old ones and considering taking a little off the table prior to the close today. “The Week Ahead” picks from Monday did pretty well especially if you paired back longs on Wednesday when I bailed on the longs in favor of common sense but I’ll have a Summer this week.

Analyst Watch: MUR upped to outperform at Bear Stearns (that’s two upgrades in a week – I guess everyone figures that the most of the expensive of the “mini-majors” has all the bad news out of the way), BJS cut to neutral at Credit Suisse.

Posted in Uncategorized | 35 Comments »

Thursday – Oil & Gas Thoughts + Lots of Cool Charts

Posted by zmann on January 25, 2007

First, The Oil Reaction. Apparently everyone is convinced that George is preparing to blitz Iran. That’s the only thing I can come up with to explain the dip and subsequent rally to $55.37 after we got another build in distillates. Somehow the following inventory data was seen as bullish. Traders may see the lower than expected crude build as a sign Opec is finally easing off the production pedal but that’s pretty thin. More likely this is just a follow on of the retracement from the greatly oversold position we were in a few days ago. Here’s the high points of the inventory data:

  • Oil: Up 0.75 Million Barrels. So imports fell 1.2 mm bopd from the prior week. I’d point out that a look at the 4 week average crude imports figures shows Opec is not yet serious about the cuts. 1/05/07: 9.416 mm bodpd, 1/12: 9.954, 1/19: 10.124. Thats a 7.5% INCREASE in oil imports in 3 weeks.
  • Gasoline: Up 4 Million Barrels. It was icy, nobody likes to drive on ice. Actually demand is off only ever so slightly but the refiners are really starting to trim production.
  • Distillates: Up 0.7 Million Barrels. Analysts were looking for a draw of between 250,000 and 1 million barrels. The average change in storage for the third week of the year back to 1999 is a withdrawal of 2.5 million barrels. We got a build and the weather was colder than normal. Hmmm.

Crude Inventories Remain Comfortably Above Average. That dip occurred when refineries cranked up activities late in the fourth quarter. I grudgingly give some credit for it to Opec although compliance with the first two rounds of cuts is still less than 65%. The slight uptick is a combination of a one week surge in imports and the refiners calling in sick.

crude-inventory-012407.JPG

Product Inventories Continue To Reverse Course And Rise. Not unseasonably strange for gasoline but heating oil is just unloved here.

  • Gasoline inventories have jumped 20 million barrels in the last five weeks even as refinery utilization levels plummetted from 91 to 87.4%. Moreover, the days of supply chart confirms that the inventory rise is attributable to slack demand and not just a flood of imports. In fact, gasoline imports fell 12% week over week and were below year ago levels.

gasoline-new-012407.JPG

  • Note To TSO: You’re Starting To Look Overheated. TSO has been the refinery analyst’s dream for one reason: PADD V (West Coast) cracks have been running roughly 3x those of the Gulf Coast. Everything else those guys cover has seen margins fall between 30 and 40% on a sequential basis but the West Coast margins were actually up 20% 3Q to 4Q and a whopping 50% YoY as high demand kept tougher to produce (I know, not as tough in the Winter as in the Summer) California gasoline inventories in check. However, since the third week in December, PADD V stocks have begun to build (their refineries aren’t the ones with the blue flu) and the Los Angeles benchmark price has started to catch up to the declines in other parts of the country seen earlier in the month.
  • Distillate Inventories: Even I thought we’d get a small draw on stockpiles but the high secondary and tertiary inventory thesis yielded another build in inventories despite the coldest weather of the winter to date. Looking at the pattern below you can see how seasonally odd the weekly trend is. Note that this is all distillates (including diesel and not just heating oil) so at least it’s not bad news for the trucking stocks.

heating-oil-012407.JPG

Natural Gas Inventory Day: Good Sized Withdrawal Simply Won’t Matter

  • My Estimate: 165 Bcf withdrawal based on 230 heating degree days… On the surface the higher degree day reading would seem to imply a higher number than mine as seen here…

gas-vs-hdd-012407.JPG

…And while its possible that we get a big kahuna pull the degree days were in the wrong areas to score a bigger draw. I could always be wrong on this and the reaction to even a small number may be as perplexing as yesterday’s action on oil but with gas up 20% in five days, its not that big a leap to make that gas needs a huge withdrawal to stay above $7 for any length of time.

Consensus Range: 150 to 190 Bcf Withdrawal. That’s probably Fimat on the low end those baggers!

The number to beat is probably 168 Bcf. That was the largest withdrawal of this season which was recorded in early December. Anything less and we should get a sell off and I think, as I said above, we’re coming in light of that number. I could always be wrong on this and the reaction to even a small number may be as perplexing as today’s action on oil but with gas up 20% in five days, its a not that big a risk to take.

January Is Shaping Up To Be About Average.

gas-table-012407.JPG

Estimates are in red

I’m even sporting a number for next week’s withdrawal! Next week shoudl see more demand despite an early aggregate degree day reading that is a bit warmer than the one last week. The HDDs simply appear to be moving into more gas centric regions:

weekly-gas-prediction-012407.JPGclick me to expand.

Even if this week and next week yield 170ish Bcf sized withdrawals you’re left with record storage for this time of the year of 2,596 Bcf. The previous record was set just last year at 2,494 Bcf. Moreover, 2.6 Tcf is well above the five year average of 2,180 Bcf.

After this week you’ve got about 10 weeks of winter left. The low to high range of withdrawals for this 10 week period (1994 to 2006) is 714 to 1,280 Bcf. If I assume that I’m right about the 165 Bcf today that yields trough storage (end of March) of 1,491 Bcf based on the max withdrawal case up to 2,057 Bcf on the weak withdrawal scenario. A verage trough over the last 12 years is 1,025 Bcf. While the hope of another withdrawal close to 200 Bcf may support prices through next week I continue to see gas testing $6 in early February and $5 later in the month.

Holdings Watch: If we get a gas withdrawal below 160 I’ll be taking more $65 puts on EOG and re-entering put positions in SWN, KWK, and/or ACI/BTU. This could be a very fast play as traders may shrug it off in hopes of a bigger number next week. However, with 20% profits in a week I’d bet they’re getting anxious.

Analyst Watch: RRC and KWK picked up a Wachovia as outperforms. Interesting to pick them up right before year end results are released. Cannacord also added DBLE at Buy.

Irony Watch: Nigeria is sending troops to Somalia. Ethiopia is beginning to withdraw after beating back the Somalia Islasmic Courts Council (SICC), the once leading opposition group to the transitional government of Somalia. Nigeria says it is training 770-1,000 troops and will deploy them as part of a peacekeeping force in about two weeks. Comment: if these guys have been just sitting around how come the government didn’t deploy them to the Niger Delta? Even worse, is that where they’re coming from? If so then: 1) the’re not very good at guarding things and 2) MEND will have a big party and “invite” a lot of foreign “guests”.

Earnings Watch:

  • OXY just turned out a meet on the top line and a beat on the bottom. I’m not familiar with exectations for these guys going forward (other than what I see for estimates) but for a mini-major they seem to be eaking some orgainic production growth while maintainig profitablility in their Chemical division. In other words, nothing leaps off the page as a waring flag unlike at COP and those guys rallied on their “results” yesterday. People who think MUR and MRO are takeouts should really give OXY a look from that perspective.
  • SU‘s 4Q performance and plans for 2007 look pretty much as expected so it’ll probably just continue to trade tightly with oil. The fragility of the oil sands, both physically and economically becomes readily apparent when you note how often their’s an insurance payout clouding results after a fire and how often $/boe operating costs can jump 20% in a quarter on higher labor or gas costs . Directionally, these guys are very much moving the right way and they’re even diversifying into ethanol (trendy, trendy) and wind farms.
  • CNX provided a beat because they are relatively under-exposed to spot market prices and they’re predominantly a high BTU eastern coal player where demand has held up better. They did make some cautionary statements about the weather having yielded high coal inventories at utilities. More later….

Posted in Uncategorized | 28 Comments »

Wednesday – Oil Inventory Day

Posted by zmann on January 24, 2007

Oil Rallied Strongly Yesterday (up $2.46) To Hit $55 (Nice Round Number) In An Over-reaction to Energy Secretary Sam Bodman’s comments regarding plans to double the Strategic Petroleum Reserve’s capacity. Sam is now officially the 12th man on Opec’s offensive line. How do you say you want to double the storage capacity of the Strategic Petroleum Reserve to 1.5 billion bls in one breath and then go on to comment that this will have no impact on the oil markets or gasoline prices? Here’s the plan and its impact:

  • Double SPR capacity to 1.5 billion barrels and fill it by 2027.
  • Currently there are 688 mm bls in storage and the SPR has a capacity of roughly 750 million.
  • If we assume it takes 3 years to add the additional storage loading facilities and associated pipeline infrastructure that leaves us 17 years to fill it up or 884 weeks.
  • If we straight line the fill that “creates new demand” of 850,000 bopw (or 120,000 bopd).
  • The good news in all this is the coincidentally timed expansion plans announced by the Saudis last Thursday. With the extra 1.7 mm bopd they should be easily able to handle both the growth in our SPR, expected global demand through the first 3 years, and a number of announced/rumored national petroleum reserves being more quietly created in China and elsewhere.
  • The oil market didn’t suddenly become tight overnight. Besides, in the two years a new administration crush oil prices and be a local hero by putting a halt the expanded SPR fill!

Oil Inventories still expected to rise as refiners gear down for more maintenance. As long as fog didn’t shut the HSC again we should see healthy builds in crude (as the mini-cartel of US refiners take another blue flu week) and gasoline (as consumers stay off the icy roads).

  • Crude: up 1.3 million bls – I think it’ll be bigger since refining capacity is expected to be down again to 87.5%.
  • Gasoline: up 1.7 million bls
  • Distillate: down 250,000 bls – I said earlier that we shouldn’t see wouldn’t be a big withdrawal but that seems like a really low ball estimate to me designed to disappoint in favor of the bulls. As always this time of year, this is the number that will drive crude unless the overall crude number is very large or very small.

Holdings Watch: Sitting tight on further action until the oil pendulum stops swinging like a metronome. We still haven’t managed 2 straight days of gains in crude this year and early action . Volatility is of the charts and the stocks remain disconnected from the price action in crude.

XOI- Up, Up and Away. Over the last two sessions the oily XOI smashed through what had seemed like a top at 1,130 and accelerated it’s gains on Bodman’s comments ultimately rising 2.4% to 1,156 on Tuesday. As the chart below indicates, the large cap oil-centric energy stocks are flat since the beginning of the late summer commodity sell off and oil, as measured here by the USO, is down 35% making the disconnect readily apparent. I’m told the stocks are cheap but the timeline of that comparison is relatively long. Pare it back to the last 5 years and you get a very different (pricier) picture. Thankfully data on earnings, reserve replacement and finding and development costs will start to play more into the moves for the next two weeks although I wouldn’t be surprised to see another 3 to 4% technical rally from here.

xoi-vs-uso-012307.JPG

Natural Gas: We’re up 22% in four days! Tomorrow’s column will have all the juicy details but lest you think I just watch the Street for guidance I’m looking for a draw of 165 Bcf from Thursday’s inventory report. This is just under the 168 Bcf draw reported in the first full week of December. I even had to pad my math a bit to get it that high because it just wasn’t cold enough in the right areas to yield greater demand. Ok I just checked the newswire and I’m seeing no consensus but a range fo 150 to 190. Honestly, I produced my number yesterday…I promise.

gas-price-detail-12307.JPG

Earnings Season: In General Here’s What They’re Up Against. Pretty Ugly Comps Except For The Well Hedged Or Geographically Fortunate (TSO)

4q06-price-deck.JPG

Compliments of Citigroup and a good friend of the blog although I did the 10 key myself.

SU Plant Fire At #2 Oil Sand Upgrader. If you have any of these puts remember that it’s always safest to sell the initial drop (if any) and re-establish on the bounce. Three out of four times this tactic saves you a lot of agony. If it’s one of those other times you can cast stones at me on the About tab. Just an FYI, these guys report on the 25th and their production levels and gas costs should be in line with estimates so I wouldn’t expect much downside unless they say there will be significant downtime due to the fire.

Analyst Watch: OXY upgraded to buy at Goldman, RDS.A upped to neutral at HSBC.

Odds & Ends: 

COP Kicks Off YE 2006 Earnings Season: $1.91 Vs. Expectations Of $1.96. Don’t be fooled by the impairment charge…it was expected so you’re looking at a good solid nickle miss. More on this in comments but nothing earth shaking so far from the PR.

President Calls For Increased Vehicle Mileage. The president’s plan is to reduce gasoline consumption through a combination of increased fuel efficiency (4% per annum for cars and trucks with 20% achieved by 2017) and increased ethanol blending (which is old news and really stinks if you like corn tortillas). I have always espoused that US energy policy must embraced a combination of advancing efficiency standards and greater access to domestic resources. Sadly, in a move that is contrary to his party’s Ed Bagley Jr ways, John Dingle, dem from Michigan, is already taking a “not in my backyard stance” by saying the president’s goals “drip with questions”. Here’s a question for Dingle: Do you seriously mean to tell me that the US carmakers can’t boost efficiency by 20% in 10 years? If that’s the case then you better let us drill ANWR, and off the coast of Florida down towards Cuba, and in all the restricted parks in the Rockies. Honda can build a humanoid robot that walks, runs, and dances but we find it hard to get a Buick to go from 28 to 34 MPG over a decade. That’s just sad.

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Tuesday – Oil Continues To Yo-Yo

Posted by zmann on January 23, 2007

Oil Just Couldn’t Manage To Gain For Two Days In A Row. After a promising opening (for the bulls at least) which saw February crude add another $1.45 onto yesterday’s buck fifty advance to reach an inter-day high of $53.44…the bulls exhaled. Crude fell like the value of the Dinar on payday I assume on scurrilous rumors that there’s a lot of the stuff stockpiled all over the globe right now. When the dust settled, the February contract settled down $0.86 at $51.13. Year to date oil has still not managed to put together two up days in a row. This morning crude is up slightly on more kidnappings in Nigeria but I wouldn’t expect that strength to last long.

We should get another “$50 test” this week. The March crude contract closed yesterday day down $0.82 to $52.58. To be fair if we reach $51.45 on the March contract that’s the same as hitting $50 on the February. However, the psychological impact of breaking $50 won’t actually be as powerful until we break, well, $50. Near term the new contract may also rally to $55 before reversing on further high import/low refiner utilization based builds shown in crude stockpiles tomorrow. Just because it’s cold I don’t expect a mega massive draw on heating oil supplies tomorrow. Maybe next week but not tomorrow.

Opec Watch:

  • Sudan still plans to join Opec but announced yesterday that it will double it’s current production to 1 mm bopd over the next 2-3 years. Opec ministers are probably not too happy about that but the turmoil brought by adding Sudan to the cartel may well be worth it. Sudan makes Nigeria look like a day, albeit an involuntary one, at the beach. Since Sudan is relatively small as oil producers go I wonder what the thinking is on inviting them into the clubhouse? It couldn’t be that even if they cheat it won’t really make a dent but that the chances of them having a full scale civil war/becoming a terrorist state in the next 15 minutes is entirely within the realm of possibility which of course provides oil with additional “instability premium.” Nah, can’t be.
  • Speaking of Nigeria, rebels there took an American and a Brit hostage overnight. The kidnappers demanded $11.7 million for their safe return and this explains this morning’s reversal of overnight losses in crude. For more details click here.

Natural Gas Rallied Late In The Session To Score A 17% Rise In The Last 3 Days! It’s like they woke up and noticed it was cold outside which tells me this rally will be fleeting. Weak resistance is at $7.50 with a much more solid ceiling at $8. Let me just point out that we still have record gas in storage for this time of year and that $8 is absolutely and completely delusional pricing right now. By the way, this sudden rise in gas costs is not good news for SU so if oil continues to drag its feet and gas manages to hold $7 I’ll be looking for that one to head back to test $70.

Retail Natural Gas Prices Are Starting To Fall Even For The Residential Customer. Always slower to decline than the commodity (a lot like gasoline at the pump vs the wholesale price) the reduced price of natural gas is finally starting to reach the consumer. The chart below, courtesy of the EIA, demonstrates that the last bastion of retail strength, the residential component, is now lower than year ago levels. Industrial demand, which accounts for roughly one-third to one-quarter of all consumption depending on the time of the year, is touching on two year lows. So far the natural gas storage withdrawals do not reflect a sudden priced induced “demand creation” response however it may be around the corner. This demand response coupled with reduced supplies from Canada and flat to down LNG shipments could set up a tighter supply/demand balance later this year. Nothing concrete just yet but I’m always looking for things that could prove my “gas is too damn high” thesis wrong. At some point, probably in mid to late 2007, I wouldn’t be surprised to see this tightening of the North American gas market occur.

nat-gas-consumer-price.JPG

Weather Bodes Big But Not Huge Gas Withdrawal On Thursday: CPC heating days for the past week came in at 230 versus the early read at 215. In aggregate last week was the coldest of this winter (like you needed me to tell you that). December 9th was the second coldest (215 HDD’s) and saw the largest draw on gas storage season to date at 168 Bcf. However, it was colder in the eastern and producing regions of the country during that week in December. I’ll be looking for something close to a tie with that week and not an outright beat. Tune in Thursday morning for more on the math behind what should be my low ball estimate to Street Consensus.

Holdings Watch: Sitting on my notes from yesterday as oil waffles and gas rises in a suckers rally. I haven’t pulled the trigger on any of yesterday’s “week ahead” musings as yesterday’s rally continuation looked like too much of a waning head-fake move to me. I did manage to pick off the EOG Feb 60 puts at $0.50 after several hours of low balling my offer.

Odds & Ends

HATS OFF TO MURPHY OIL FOR SENDING ALL GRADUATES OF THEIR HOME TOWN HIGH SCHOOL TO COLLEGE! MUR is still expensive relative to its peers and has had some recent foibles on the exploration side, and is suffering from pretty nasty comps as commodities continue to slide but at least they’re a class act and heads up players at a time when other oil companies (BP) are reeling from repeated swirlies in the bad PR toilet bowl. Even Pelosi and Co. will be hard pressed to dress down a company that uses it’s “undeserved windfall profits” so altruistically.

China National Petroleum Corp Sees 2007 Production Down 5%. CNPC accounted for 58% of Chinese oil output in 2006 producing a record 2.14 mm bopd. This year the company sees a 5% decline to 2.03 mm bopd (a 110,000 bopd reduction) due to a combination of a aging and over-stressed oil fields and lower prices for oil which 1) yield commensurately lower capital budgets for reinvestment and 2) force some new oil projects beyond the realm of economic viability.

  • PTR may get shelled on the news. Keep in mind that CNPC rarely misses their targets since they set pretty conservative (low) hurdles at the beginning of the year (they’ve got the key to capitalism down pat: under-promise and over-deliver). However, this news will likely punch PTR, the publicly traded operator of CNPC’s assets, in the gut so forget what I said yesterday about a rebound until after the pain has subsided. If it doesn’t immediately (2-3 hours) shave 2-3 % off PTR‘s share prices I’ll be in long as a hedge on my other puts. A quick eye ball of the chart says to abandon this position if it, subsequent to my purchase, breaks $120 to the downside.
  • Bulls may grasp briefly at the China card. If spun hard by T Boone and/or CNBC this could provide another fleeting wedge of reasoning in support of oil bottoming around the $50 mark. For that to work, the bulls have got to keep Saudi Arabia’s plans to massively increase surplus production capacity out of the headlines. Maybe they can get the Chinese to shoot down any satellites orbiting over Saudi Arabia so no one can get snaps of the city sized refineries they’re about to build.

Analyst Watch: FBR ups PEIX to buy (don’t those guys use high priced corn to make ethanol?), and Bear Sterns is cutting ratings on most drillers it covers: ESV UDRL, WFT, THE, PDE, DRC, GRP (I’ve been saying this for weeks but they just don’t listen!)

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Monday Morning – What Next Oil?

Posted by zmann on January 22, 2007

Oil & Gas Are Racing Higher In Pre Market Trading. Oil is up $0.47. Gas is up $0.39 to $7.28! For oil I’d bet it’s more short covering as the contract for oil closes today. For gas it’s a suckers rally on more cold weather. In a nutshell both moves are follow through on Friday’s session and for oil if it closes positive it would be the first time for two up days in a row in 2007. I think this fades later this week and for oil we should get another test of $50 before the end of next week (unless of course something somewhere blows up, breaks, or gets fogged in).

Coming Soon: The Week Ahead by Popular Demand! I’ll do the cliff notes version this morning with more charts and graphs in the near future.

  • Several gassy E&P’s had 5%+ days on Friday (SWN and KWK up 7%, EOG up 5%) but not CHK. Chesapeake’s been beat up in the recent commodity downdraft despite having a majority of its gas hedged north of $8/Mcf. I’d look for a pop over $31 with gas bumping up over $7 on all this cold. However, I wouldn’t fall in love because gas will fade hard with the cold and should test $6, then $5 in February.
  • Oily Correlation. Names that have been moving tick by tick with oil over the last few months become especially intriguing when every day brings a $1 or more change in price. Of late SU and OII have followed oil on an almost second by second track. Of course, you’ve got to get the direction of oil right or it would just be too easy.
  • Watching HES Like A Hawk. Strong exploration results can’t save you from a down commodity market. This beasty is completely unscathed.
  • COP Earnings Jan. 24th. The first of the biggies to report 4Q numbers. Expecting $1.98 vs $2.69 last year. Estimates were $2.23 three months ago and have fallen 5% in the last week. These guys alread pre-announced paltry organic (non-acquisition) reserve replacement but they’ve still got to post their F&D costs (primarily the Burlington and Lukoil additions). Probably not pretty. I’m on the fence here but it’s worth watching and I’ll try to put out a mini model before numbers hit so maybe I’ll have made up my mind by then. Either way, if it scores a big beat (unfriggin likely) I’ll be looking to own XOM. A big miss and I’ll probably wait for the panic to clear before taking a very short term long trade on XOM.
  • MUR – Beaten and Rebounding? I’m staying away but looking for an area to re-enter puts as, at 13.3x 2007’s greatly optimistic earnings estimates, this is the most expensive mini-major of the group. Funny thing. They warned a week ago that they’d put up numbers of $0.40 to $0.45 on the quarter and yet analysts have only dropped them to $0.52 from $0.65. Sounds like half of the 16 analysts covering the company are still in la, la land or do they just not believe it’s possible the company could have halved analysts estimates from three months ago for the year’s final quarter? It’s no wonder Lehman upgraded it to buy this morning!
  • Refiners. Higher oil is bad. Higher products prices made from oil is good. Watch to see if heating oil and, perhaps more importantly, gasoline keep up the pace if oil continues to bounce. When crude oil levels off these guys will be the first to fall. Favorites for puts (but not right now) VLO, SUN, TSO (pumped in Barron’s this past weekend), WNR, and high priced HOC (which has burned me 3 times in the last 3 months).
  • HAL vs SLB. SLB beats and runs over 5% on Friday. HAL rallied only half as much, is cheaper (thanks to Pelosi and Co.) but probably fairly safe for a “service isn’t dead yet” rebound. After all, the service arena has been getting stomped but the earnings numbers that back it up are flat with those of three months ago (strictly service and not the drillers). It may be worth a bounce to $31 and then back out. By the way, the drillers may bounce like a new day is dawning but as soon as gas stalls I’ll be buying back into puts on the land drillers as well as a few offshore names.
  • Other Names That Could Get A Boost If Oil Holds It’s Short Term Gains. Solid operators NFX and SFY. Both have been knocked for a loop, 20% since early December as investors shunned the mid-cap E&P names for safety stocks like XOM. On Friday, Newfield cited weather delays at multiple projects that prompted what I’d call a pretty short sighted Morgan Stanley downgrade. This is the fourth downgrade since October and with the stock 20% off it’s highs this starts to look a lot like most of the damage has been done here. At 9x 2007 estimates I’ll take it’s 20% expected EPS growth (which admittedly may be a bit too high based on assumed commodity prices) over XOM‘s 12x 2007 earning and negative 4% growth track. As to SFY they’ve got a large prospect inventory that’s oily and delivering double digit production growth for them. If oil stabilizes between $45 and $55 these guys have a license to print money.
  • Important Note: I’ve got more longs in the list above than you almost ever see from me. I am not bullish. Just looking for a way to play the irrationality factor while I hunt for better entries on puts. Besides, if all I ever did was write about the short side I become one of those guys that everybody goes, “oh sure, here comes the perma-bear, doom and gloom, broken record guy” and I realy hate those guys.

Friday Was Not A Great Day For The Bears. If only I’d taken my own advice and pulled out when oil failed to break $50. On Wednesday referring to $50 oil I said… If we don’t knife through it the bounce could be very painful so watch your puts. Unfortunately I was all too right. I managed to pull out some luck with the Januaries but am still holding a few of the longer dated puts.

March Becomes The Front Month On Tuesday. Don’t let the jump in price fool you! The March over February spread was $1.41 at the close on Friday. The 12 month and 24 month strips look like they are halfway through a deadcat bounce already (maybe another $2.50 to go) and there isn’t a month out through 2009 above $60.

Traders Bet Long In SIZE BEFORE The Inventory Data Was Released. According to the CFTC, traders couldn’t get enough oil contracts last week. With this data in hand last week can be seen as a “Data be damned, enough is enough”:

  • The CFTC reported a massive reversal in the net position which had been falling for the past five weeks. Long positions jumped by 15,700 contracts or 9%. Meanwhile, shorts took the money and ran and speculative short positions fell by 18,600 contracts or 11%. As such the net long position more than tripled to 49,500 contracts, a level not seen since early December when oil was $64.
  • The move came with record open interest. As you can see in the yellow wedge below, speculators are making a big bet this time.
  • The reversal came just prior to the release of the weekly oil inventory data, which showed much higher than expected crude and gasoline inventory builds (click here for details on last week’s inventory numbers) . That data didn’t come out until 18th when traders had already made their bet simply on the $50 technical/psychological level. This means Friday, in a sense, was a double down.

nymex-crude-cftc-011607.JPG

Opec Watch:

  • Cartel Trims Demand Forecast. They did this Friday but it had no impact so I’ll repeat it here. The cartel cut it’s estimate of global oil demand growth by a miniscule 70,000 bopd to 1.3 mm bopd for 2007.
  • Much More Importantly, OPEC Has Been Dumping Treasuries. According to Bloomberg, oil “exporters including Indonesia, Saudi Arabia and Venezuela, sold 9.4%, or $10.1 billion, of their U.S. government debt securities in the three months ended in November. Opec last sold Treasuries for three straight months in June 2003. Some things to keep in mind:
  • If Opec keeps selling tresauries in favor of non-dollar assets (Euros and Gold) it has to have a negative effect on the dollar. After all, Opec is the 4th largest holder of US treasuries after Japan, China, and the UK.
  • Several Opec members (including Saudi Arabia) and non-Opec major oil producers (Putin) have voiced both a lack of appetite for US treasuries and a desire to switch oil transactions to Euros. Again not good for the poor dollar. Non-opec nations hold a little over $100 in U.S. treasuries vs Opecs $95 billion.
  • If the dollar falls it lends support to crude. Plain and simple. Not a panic button here but something to keep in mind.

Holdings Watch & Sentiment:

Oil prices remain foremost in everyone’s minds. If they’re flat or up then, to make a great oversimplification, so to will the stocks be. In the event of a warning form XOM or other majors which I full expect before the end of the month this linkage could erode and the stocks should become a little less resilient. Remember, two out of three days year to date have been down for oil but not so for the stocks.

I’m not forgetting gas but everyone else had been up until Friday. Then a new NOAA report forecasted a continuation of the cold weather into February and February gas shot up $0.56 to close at $6.88. I doubt very much the sustainability of this overnight bounce to $7.24 but I’ll wait to make any negative bets until this Thursday when 1) this expected big gas pull is out of the way and 2) the weather picture for next week firms up.

What gives? The Street keeps proclaiming that energy stocks are cheap and should be bought despite the recent slide in commodity prices. Actually that slide has been underway since the beginning of August for crude and since December 2005 for natural gas so I guess it’s not really recent but ongoing.

Anyway, those guys will tell you the energy stocks are cheap and to buy, buy, buy… Even were I to say the energy stocks aren’t all that cheap relative to recent historic levels (which also factored in considerable double digit annual growth- not any more!) that wouldn’t change the fact that the big research boys continue to find buyers for their recommendations. “Those high commodity inventories? Listen buddy, they’re going to pass before you know it! So how can I get you into 100,000 shares of XOM today?” Please…

…And this comment from S&P makes no sense to me. Someone please explain it to me. It hurts my head. From AP: “The expectation for the weaker earnings is largely factored into oil industry stock prices”, said Howard Silverblatt, S&P senior index analyst. But he cautions that “not everyone prices in ahead of time” — meaning the stocks could have further to fall once the official earnings numbers are in investors’ hands. So are they (stock prices) or are they not discouting lower earnings numbers. I’d say not but his statement really hurt my head. It’s some sort of multi-dimensional paradox to even think that way.

Question: What’ll make them sour on the group? Sustained oil and gas prices below $50/bls and $6/Mcf respectively in February? A mis-step from COP this week or a warning from XOM? Maybe. I’ll have some historical representations of the high and low forward trading multiples out later this week and you’ll see that there’s cheap and there’s where we are now. As always, thanks for reading.

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Friday Super Mega Oil Post – Set Aside A Little Quiet Time For This One!

Posted by zmann on January 19, 2007

Oil: $50 Test Achieved! For about five minutes we hit the mark even falling to $49.90 before a very late session bounce lifted the February contract to a more palatable $50.40. Talk about saved by the bell! I think we may get a brief bounce but that we’re ultimately headed to $48 if not $45. While oil closed off another 3% the energy stocks of course held the line with a muted and only slightly down day. It’s not like they sell this stuff…

The inventory data was about as bearish as you could ask for from weekly statistics:

  • Crude up 6.8 mm bls! No one thought it would be that high. Not even the Fimat handicappers who topped estimates a 2 mm bls build. Like I said earlier this week, the four week average tanker loadings are expected to be up through the end of January. Kind of puts the kibosh on theories that Opec members are actually complying with their already announced cuts. Even the generally more conservative (and accurate) American Petroleum Institute recorded a massive build in crude stocks of 7.3mm bls. CNBC attributed this to a double time processing of the backlog of tankers entering the Houston Ship Channel but the drop in refinery utilization from 91.5% to 87.9% most certainly played a larger role. Imports also jumped by 1.5 mm bls over the prior week (cheaters, cheaters)
  • Distillates at 900,000 bls – probably the last build for a few weeks but I wouldn’t expect a series of big draws correlated to the second cold snap of the season (the upcoming week is estimated to be about the same as the weather in the first week of December). Full storage tanks at distributors and homes should help to moderate demand at least for 2-3 weeks.
  • Gasoline up 3.5 mm bls. What can I say? Implied demand remains fairly strong (up 1.2% vs the year ago week) due in part to the warm weather. The gasoline build reported next week would have almost certainly been bigger with the winter storms this week snarling traffic across a broad swath of the U.S. but the increased refinery downtime will probably offset.

The following charts pretty much say that we’ve got plenty of everything:

crude-inventories-011907.JPG

And Now For Something Completely Different (And New!) The preceding charts are your pretty typical snapshot of the data and they point to healthy inventories relative to demand for the last two years. However, in this week’s data release the EIA made available long term historical days of supply data but didn’t bother to graph it in their weekly. So I did. What it shows is that the US is well supplied relative to the long term history and when you overlay this data with crude you’ve got to ask, even after the recent price decline, why crude is even this high.

days-supply-vs-oil-price.JPG

We have roughly the same supply demand dynamic that we had in the late 1990’s and yet prices are 5 times as high. Don’t get me wrong. I’m not saying we should go back to $12 crude. I watched the unemployed oil workers walk down Congress Avenue in Austin enmasse and it was a sad time. I’m just proposing that there is an argument for lower oil prices based on U.S. data which many of the “we’ve fallen too far and oil has got to rally ” crowd don’t know about or are ignoring. That’s only one pillar of my lower oil argument which includes rising Opec and Non-Opec Capacity and a reduction in the world’s oil demand growth rate.

One Last Oil Thing: Regional gasoline stocks have been rising fast everywhere but on the west coast. Now PADD V stocks are on the rise as well. TSO it was nice while it lasted!

Opec Watch: Even as prices were touching the $50 mark the Saudi oil minister was making very bearish comments:

  • Plans to increase Saudi Arabia’s oil production capacity by 40% by 2009. That’s 1.7 mm bls which is slightly larger than all of expected non-opec supply of 1.4 mm bls for 2007 (Note: IEA just cut non-opec 2007 supply growth from 1.7 to 1.4 mm bls yesterday but I missed it and the market seemed to shrug it off).
  • The minister said Saudi was looking beyond “short-term aberrations” in markets. This is a really big deal that you just can’t make too much out of. As I said earlier this past Tuesday:
    • Certain Elements of Opec Are Demanding Further Production Cuts. However, since October, Saudi Arabia has cut more barrels than the combined cuts of the remaining cartel. In December Venezuela and Iran, the two staunchest advocates for the prior two rounds of production cuts, actually registered production increases. Saudi seems to be on the fence this time having borne more than their full share of price support efforts in the past. What that’s phrase? Fool me once shame on you…fool me twice…don’t fool me again. Words to live by Saudi.
  • You could hear the simultaneous screams of “Noooooooo!!!” from the Venezuelan and Iranian oil ministers all the way to the NYMEX floor.
  • In Nigeria 6 workers were release unharmed yesterday. MEND continues to hold 2 Italians and 1 Lebanese.
  • Iranian Newspapers Criticizing Ahmadinejad over drawing UN sanctions. Cracks are forming in this guy’s support base. Supreme leader Ayatollah Ali Khamenei runs the show and owns one of the newspapers which basically said the Ahmadinejad was harming the country and had no clear strategy.
  • I’m becoming a little more concerned about the escalating tentions with Iran. With the positioning of a second US carrier group in the Persian Gulf and a report by the Arab Times that the US is planning a strike before April 2007 the possibility of an incident is increasingly likely. If tensions keep mounting it could act as support for oil.

Natural Gas: 89 Bcf Withdrawal Pretty Much In Line With Me And The Street. I was projecting 80 to 95 Bcf so no change to my thoughts that this January will running pretty much in line with the average one. While this week and last were well short of the five year averages (combined they were short around 100 Bcf) I expect the protracted cold spell we are presently suffering through will get us to about par for the month. Again, the chart below says it all but I have more detailed comments here.

gas-storage-011907.JPG

Sentiment & Holdings Watch:

  • Oil – Bearish but with downside in the next two weeks limited to 10% ($45). Please note that 10% is nothing to sneeze at and if we do break and hold below $50 that it’ll be a very red day on your screens for the energy group.
  • Gas – Bearish but cautious. The smaller than normal draw was met with yawns as everyone is more concerned with oil and next week’s expected big winter draw. I’d not place big bets against gas just yet but in Feb I see $5s and if we warm up again through March we’ll probably bottom in the $4s.
  • Stocks: Bearish with the understanding that we still are likely to get a near term bounce if oil fails to pierce $50 fairly quickly but then I’ll just add to puts. Otherwise, no stock specific comment change from yesterday’s post except to say that my puts against the alternative energy ETF PBW are now panning out nicely. Sometimes it’s better to be lucky than good but the timing couldn’t be better since I still hold some Januaries that I had thought were worthless.
  • The stocks pretty shrugged this off as well. The House of Representatives easily passed H.R.6, the so called “reduced dependency on foreign oil” bill which would recoup billions in unpaid royalties from oil companies. The bill is also known as the Clean Energy Act of 2007 but the first two section deal with 1) ending subsidies for domestic oil and 2) ending royalty relief in the Gulf of Mexico for certain leases. Those 2 items do anything but reduce our dependency on foreign oil since they make it harder for companies to economically produce it. No matter, the title must come from the third section which deals with subsidizing clean energy projects through the establishment of a “strategic energy efficiency reserve.” This reserve comes from the monies generated by the first two items and is to be used “to offset the cost of subsequent legislation” to accelerate promote and invest in R&D. Not to pay for those things but to pay for the legal costs of getting them enacted. What a boondoggle.

Analyst Watch: Nothing, nada, zippo.

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Thrill A Minute Thursday – Two Inventory Reports!

Posted by zmann on January 18, 2007

We get both oil and natural gas inventory reports from the EIA today so in the immortal words of Samuel L. Jackson, “Hang on to your butts!”

The Deal With Oil Prices – Question: When was the last time oil strung together two whole consecutive days of gains? Answer: December 29. And it’s not simply two steps down and then one step back up. It’s sizable moves to the downside that leave people asking a second question: What is going on? Answer: speculators are reversing long held bullish positions. They have seen the writing on the wall and are moving towards the nether realm of the shorts.

I give you two charts built strictly from CFTC data that records the activities of non-commercial futures market participants (otherwise known as speculators). The first chart reflects the net position (longs less shorts) of speculators (otherwise known as hedge funds) participating in the buying and selling of Light Sweet Crude futures contracts on the NYMEX. This is generally what we think of oil. The second also reflects a net position held by speculators but this time the contracts are West Texas Intermediate ones (WTI) or the world’s oil price as I like to call it.

oil-cftc-011807.JPG

Please note the trend of both is not positive.

Notes on the above charts: 1) Shockingly the net position in light sweet crude contracts looks a lot like a chart of oil prices. Hmmmm… Can it be that hedge funds (ahem, speculators) have that much influence on oil prices? 2) I used all the data the CFTC had for WTI contracts so there’s nothing I can do about the short nature of the chart but the trend is the same. Importantly, the USO ETF is backed by WTI contracts. Maybe that’s why the CFTC saw fit to start tracking them a couple of months after the fund started buying so many to back its units.

$50. “Not If But When.” … many technical analysts said it is not a question of if but when the market will test the $50 support level. “Most of our charts suggest the prices will continue heading south, perhaps punctuated by the odd bounce,” Man Financial said. I’m no TA guy but they are.

International Energy Agency Cuts Oil Demand Forecast. IEA cut its oil product demand growth forecasts for 2006 and 2007, citing significant revisions in the United States, mild weather, adjustments to U.S. GDP assumptions and lower apparent demand in the former Soviet Union countries. The IEA is now forecasting demand growth of 0.9% for 2006 and 1.6% for 2007. That’s a downgrade of 120,000 barrels a day for 2006 and 160,000 barrels for 2007 -from Market Watch.

Oil Inventory Consensus:

  • Crude stocks UP 200,000 bls (which would be the first rise in eight weeks). The range is giant with Fimat expecting a build of 2 mm bls (there’s no stopping these guys!- anything less is obviously bullish!!! They are so obvious!) and Wachovia expecting a draw of 2 mm bls.
  • Distillate stocks UP 1.5 million bls, – actually sounds fair but bearish for the commodity. While, I think this may be the last of the big winter inventory builds for several weeks the secondary and tertiary inventories I’ve oftened referred to in the past should mitigate sharp withdrawals at this point.
  • Gasoline stocks UP 2.3 million bls, – Retail gasoline is off about only $0.06 (greedy retailers) while wholesale levels are down $0.30 so I don’t doubt that inventories will continue to build.

Opec Watch:

  • Saudi Quiet After “Market Very Healthy Comment.” All quiet on the Saudi front after Tuesday’s bombshell of a comment that that prior cuts are working and there is no need for further cuts since the market is very healthy right now. Pretty smart move. Disarm the sense of panic.
  • Nigeria Not So Quiet (as usual). MEND killed (not captured) a dutch oil worker and a Nigerian military serviceman this week. Meanwhile, three AGIP employees appear to be on the cusp of release and the government said Tuesday that it is deploying more troops to the Niger delta where it’s becoming as dangerous to ride in an oil service supply boat as it is to driver a Hummer in Bagdad. Nigeria’s oil minister advocated a wait and see approach as to the effectiveness of the upcoming February cuts echoing the Saudi minister that no emergency meeting is needed.

Natural Gas Fell $0.40 To $6.23 Wednesday but got little attention as oil rallied a buck. If $5o is the big test for oil then $6 is becoming the test for gas.

  • Consensus: I’ve seen two estimates at 80 and 88 Bcf but I ahve nots seen a consensus as of this morning.
  • My Estimate: 80-95 Bcf. You had the second coldest week of the year in both the east and west consuming regions and the third coldest week in the producing region.
  • And still it doesn’t stack up to historical norms: The 5 year average for the second week of the year is a 117 Bcf draw with a with a withdrawal range of 46 to 153 Bcf.
  • That’s still pathetic and not anywhere near to getting us back on track to forestall high inventories in April and commensurately low gas prices $4-$5.
  • Warning: Next week will be bigger and traders may choose to ignore this week’s number as the east remains in the deep freeze. Next week you’re looking at a tie for the coldest week of the winter to date and as such we should be a respectable pull of between 170 and 200 Bcf.
  • Excluding 2006, the five year average January gas withdrawal from storage is 563 Bcf. We’ll know more after today but at present this month appears to be shaping up to meet average withdrawals for January. I personally think it will fall short but if we assume that the last half of January stays this cold then storage hits average levels.

jan-math-1.JPG

Anyway, more about storage in tomorrow’s post.

Holding Watch: Still like puts in the gassy stock realm on APC, EOG, UPL, and BTU (it’s coal but believe me it trades with gas or this chart wouldn’t look so familiar) although a rising tide (oil) will life all boats if indeed the tide comes in. Still holding perennial putter MUR – (too expensive, out estimates still falling), as well as EEE, PBW, (a couple of bets against expensive techy energy), and am looking hard at the re-entering positions in the drillers (see yesterday’s post).

Analyst Watch: No activity.

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