zman’s Energy Brain

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Thursday Morning – 1/4/07 Cracks Appear In The Energy Bull

Posted by zmann on January 4, 2007

Oil Got Bludgeoned Yesterday. Falling $2.73 (4.5%) to $58.32, the February crude contract hit it’s lowest level since mid November. Support lies between here and $57.50 and you don’t have take my word for it that oil is looking weaker than it has in recent past retrenchments. I half expect talk of an emergency meeting of Opec (so far they appear pretty calm about yesterday’s slide), increased Nigerian rebel activity (more below), or blunders at BP to emerge before the end of the week to shore up oil prices. This morning oil is up slightly and I wouldn’t be surprised to see a modest dead cat bounce in oil today. Notably, the USO ETF hit an all time low of $49.40 since it was rolled out last April. It seems that the launching of multiple ETF’s for a sector is a good indicator of at least a near term top for that sector. Products had a rough time as well:

  • Gasoline – down$.067 to 1.55
  • Distillate – down to $0.06 to $1.59
  • Cracks – back over $7 per barrel to $7.34 yesterday as oil fell a greater percentage than products. I don’t see cracks holding up much longer with warm weather now expected to continue through the end of January depressing heating oil while the imposition of the second round of Opec cuts (Feb 1) should lend support to crude (at least initially).

COP just warned downstream margins will be “well below” 3Q levels. Not good for the independent refiners, the majors (especially XOM), my MUR, COP of course, and chemical companies as they warned about that too.

    Rebel Watch: MEND accuses AGIP of perpetrating fraud in trying to release four oil workers taken hostage two weeks ago. It seems that the oil company tried to bribe the guards around the hostages with N70 million (about $570,000). Wow…fraud…that’s a big charge coming from a quasi-terrorist group.

    Analyst Watch: At least the trucking analysts are paying attention to commodity prices. Starting to see some upgrades of truckers from multiple brokerages (I often play a few truckers as a hedge). In oil service land ESV, WFT, BJS all from buy to hold at Wachovia. RDC PT cut from $58 to $37 at RBC Capital I assume over the NBR warning.

    Holdings Watch: Man What A Day! I’m not going to be greedy after yesterday’s gains and will be punting January positions today and tomorrow. I’ll wait for a good bounce before rolling back in the Febs.

    • XOI fell 3.2%, it’s biggest percentage loss since October 3rd and support looks to be about 1.7% lower at it’s 200 dma.
    • The gassy stocks, as represented by the XNG also had a bad day falling 2.5%. Here support looks to be close to 400, well below the 200 dma, or about 7% below current levels.
    • MUR and BTU were more than doubles today but remain in play (maybe I’m being a bit greedy). The former is still too richly priced and in two industries (E&P and R&M) that are going to suffer further pain with commodity prices this low, if not lower soon. The latter is suffering from an increasingly cheap competitive fuel (natural gas) and an increasing YoY coal inventory surplus (the result of rising coal production and weak demand last summer).
    • APC 40 Jan puts rose 100% on the bid but are still just a gamble. Getting further asset sales done at good prices should become increasingly difficult. Then there’s the question of the timing/pricing of the acquisitions. I may role into a more substantial position here given any bounce. True, the company is cheap on forward multiples but those CFPS estimates can slide substantially if oil and gas correct despite the acquisition based hedges.

    The Oil Service Ship Is Listing.The OIH fell 4% yesterday in what looks like a very extended right shoulder of a head and shoulders top. I really missed the boat here (I’m lumping drillers with oil service which is a bit of an oversimplification but you get the point). I’ve been calling for a pullback in the onshore drillers for some time to no avail but am practically out of the game currently.

    • From small barge-day-rates.JPG to large ju-day-rate.JPG, rig day rates have climbed into unsustainable, nosebleed territory.
    • E&P and majors in the US and especially Canada are feeling the pressure of monthly increases in service costs and have begun to design smaller capital budgets in the face of these rising costs. Again, not good for what has been four years of rising rates for the service guys.
    • If we get a modest bounce I’d be looking to add put positions in oil service and in land and diversified drillers from BHI and HAL to BRNC, PTEN, PDE, GSF, and NBR (who warned for the 4Q yesterday and got slapped…they can’t be alone in this!).

    But I’m Not All Bearish. I like PETD as a fast growing gas producer out west (where prices are likely to have already bottomed) and, thanks to Gunga, TEC. Both of these guys are involved in plays that could greatly benefit from new microhole coil tubing drilling that has proved extremely beneficial in the Niobrara.

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    12 Responses to “Thursday Morning – 1/4/07 Cracks Appear In The Energy Bull”

    1. zmann said

      Watching MUR very close here. Another buyout rumor on CNBC yesterday. More of a “gone in 2007” comment. I doubt it will be soon but these can burn you near expiration so I’m walking away for greener (sorry, redder) pastures until it calms down.

    2. Wow 5M build in gasoline and 2M build in distillates.

      -SaneO

    3. Attacking Mid said

      I wondered why MUR was rising suddenly.

      I dumped a lot of puts last Friday that would have made me a very happy man this week. One never knows, however.

      I picked up some SU calls before the close yesterday, dumped ’em this morning, then bought ’em back x2 just a bit ago. Hoping for at least a bit of a bounce here at some point.

      BQI will be coming out in about 2 weeks with an update on winter drilling progress. I was hoping for the stock to drop with everything else, but it seems pretty solid at 5 bucks. The options are thinly traded and have ridiculous spreads at times, but I did pick up some Feb 5.00 calls today for $0.55. If the results are encouraging, this stock could shoot up nicely in just a few weeks.

      AM.

    4. zmann said

      I’ve got a stop in for my MUR puts but it doesn’t look like it wants to run without oil rising.

      AM, Nice job on the SU!

      I’m thinking hard about puts on the fringe refiners again. HOC and WNR but will wait for a bounce this time.

      BTU continues to suffer. Heh, heh, heh.

      Notice how no one cares what natural gas is doing and its just sitting above $6 right now? I think that will change tomorrow with inventories. Lots of year end headlines should read: More Gas In Storage Than Ever At Year End. January Remains Warm. If oil doesn’t bounce too much, we could see more sharp selling in APC, EOG, DVN, COP, KWK, SWN, CHK.

    5. zmann said

      50% retracement of yesterday’s move in EOG – getting kind of interested in new puts here. Feb $55s are $0.75. Not a terrible bet if gas heads to $5 during January as I think it will.

    6. zmann said

      Check out the daily on UPL. I day up, three or four days down for all of December. Today is the up day and its a 60% retracement of yesterday’s losses.

      This is one seriously expensive E&P company. 23 forward and that’s suspect with prices falling vs 8-12 for most of the bigger gas names and 18 to 20 (which is too high as well) for the mid caps.

      It’s oil off the coast of China – pretty predicatble growth there from offshore platforms – no real surprises likely until mayber early 2008. In natural gas they are primarily in Wyoming which isn’t worth all that much right now with some other small exploratory efforts in the Rockies (Pinedale Anticline) and in Pennsyvania (which could be big but again it’s gas and not until later this year)

    7. jon said

      At what price level would it be time to bet long on the likes of CHK? It has traded between 27 and 34 since Katrina, today it’s at 28 and a bearish inventory pending (or at least it should be) might knock it down a bit more. But as soon as winter finally arrives, won’t gas prices be propped up again, and CHK will work it’s way back up towards $33?

    8. zmann said

      Jon,

      Calls between now and Mar/April are for day or very short term trades only in my opinion. While reserve replacement announcements could buoy the stocks temporarily I think the medium term direction is down. CHK is the cream of the gas crop so it’s the right name but it could get whacked as a hold. If we start to see some more weather on the 2 week out forecasts or the stocks have 2 or 3 days of down 5% then it would be one I’d go long but only for a trade right now. As to price it’s impossible for me to say but I’ll let you know when/if I do it. Ok?

    9. Attacking Mid said

      I hold some long term CHK shares, but I can’t ever seem to make money trading that stock.

      UPL were the only puts I held over the 4-day weekend. Made a nice little profit when I sold yesterday. That stock is worse than SU when it comes to manic-depressive followers. Also like SU, it can bite you if short when it decides to ignore all fundamentals and jump up for little apparent reason. It’s as if it has a cult following of buyers who see any pullback as an excuse to buy it up at any price again.

      My SU calls aren’t faring so well. Fortunately, I left plenty of room to double down if I want. I see the 67 range as worst-case bottom scenario. Oil would need to keep going down for SU to get that low IMHO. I may double down if oil prices show signs of a bottom.

      I don’t even want to calculate how much money I’d have made had I been stupidly brave and held all my puts from last Friday :^ (

      AM.

    10. zmann said

      Am,

      Never look back on those quick trades…too frustrating. Still haven’t cashed out of MUR never hit my stop so I’m just marking my stops up every time it moves higher. Fun position to be in. Same with BTU for now since that one’s so volatile.

    11. jon said

      I saw some bullets on CNBC about 30 minutes ago, these caught my eye:

      – Saudis are cutting prices.
      – Nigeria increasing production.

      Did I read these correctly? I wasn’t able to hear the commentary.

    12. zmann said

      BTU just tripped my stop. Bot for $0.55 10 days ago, sold for $3.50 today. Not bad. Will wait for bounce in energy to reenter same. Still has highest fwd multiple and coal still looks lousy.

      Jon – didn’t see that but the Nigeria makes sense. Like to know what cutting prices out of Saudi meant. I’ll rewind the DVR and see.

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