Happy New Year! Energy Year In Review 2006 (1-3-07)
Posted by zmann on January 3, 2007
Sentiment and Forecast. First let me say I’m sorry, because I have no official forecast for expect YoY change in oil, gas or anything else. I process and sometimes even bother to analyze a lot of data on a daily basis so I don’t make predictions about what will happen over the course of a year.
- I remain bearish on natural gas, oil, and coal and neutral to bearish on the stocks with a few minor exceptions. I’ll let you know if something changes but the commodity fundies rule here and the technicals don’t look so hot right now either.
- As to the stocks I feel that the remaining strength in the group appears to be consolidating in a “more select” list of names. The safety stocks (XOM and the like) are either reaching new highs weekly or are at least maintaining a close hold on those levels. The broader group of energy stocks is starting to feel the weight of increasing downward pressure on the stuff they sell while their expense line (greedy service guys) keeps rising. What follows is quick, mostly statistical download of the year that was with some forward looking thoughts thrown in for good measure. I left a lot of stuff out and will keep adding to this post over time.
Energy Commodities Did NOT (some were more mixed than others). Here’s a look at the 12 month performance of the current front month contracts:
Crude Oil (YoY price down 5%). Crude inventories are down almost 1% from year ago levels. In terms of day of supply, we have 20.7 days versus 21.3 days one year ago but the recent drop has been brought on more by a logistical snafu (that foggy HSC) than by Opec or a jump in demand.
Gasoline (down 10%). Inventories are now 1.6% below year ago levels although the recent increase in production coupled with seasonally reduced demand has pulled inventories back up into the five year range as seen here:
Heating Oil (down 16%) and falling sharply at the moment as cold weather continues to vacation. As I’ve written several times in recent months, I believe secondary and tertiary demand was largely fulfilled during November when heating oil prices were low. This effect combined with the lack of cool temps now could lead inventories towards the upper boundary of the chart below. At present, inventories are 1.3% below year ago levels.
Natural Gas (down 47% – ouch!). See more detail below but if you can’t wait then just know that we have too much gas sitting around, at least if you produce the stuff. I’ll be watching gas closest of all this year looking for signs of firming in the fundamental market. This could come in the form of a return to more seasonal winter temperatures (although it would have to be one heck of a cold spell) but is more likely to brought reduced supply – I’ve got my eye on Canada which is chopping drillng cap ex and devoting more of the gas it still plans to produce to oil sands production and not to sending it south of the border. A long period of heavily reduced Canadian imports could right the natural gas supply demand picture rather quickly.
Coal (down 31% – double ouch for the nation’s dirtiest yet must abundant energy source). Production keeps rising year after year after year albeit to meet recent higher demand. Prices for all grades have coal used for electricity generation suffered in 2006 and the early part of 2007 should see more of the same but I wouldn’t expect them to fall completely out of bed. I’ll be adding more coal features as time passes.
Natural Gas Was (Is) Everywhere. Both in terms of price and in amount. Never before has there been this much gas in storage this late in the year.
- Even the coldest winter (at least in terms of gas demand) would only reduce inventories to 14% ABOVE average.
- The warmest would be a disaster leaving storage at levels not normally seen following winter until the months of June or July!
In 2006 Natural Gas Speculators went from very negative to very positive but just in the last 2 weeks they turned negative again. Even though the media and CNBC can only find increasingly beat up looking gas bulls I continue to point out that a majority of guys who trade gas for a living are moving into the short camp. If they were very short I’d probably be looking for an upturn in gas prices but right now, shorts are just tipping the scale in their favor as longs stampede for the exits:
In the new year I’ll be adding:
- An acronym & definitions page so I can type in short hand more effectively
- Valuations Tables: Historical and forward looking valuation metrics on the Majors and Large and Mid Cap E&Ps.
- An Oil Inventories / Day of Oil Supply page
Thanks for reading and Happy New Year!