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.
- 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.