zman’s Energy Brain

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Finally Friday 1/5/07 – Round 2 Goes To The Bears

Posted by zmann on January 5, 2007

The New Year Has Not Been Kind To Commodities or Energy Stocks. Suddenly stocks are waking up to the facts that: 1) natural gas was off 40+% and oil was all but flat last year, 2) oil and gas inventories are high, and 3) that the energy stocks that sell these commodities for which there is currently less demand are seeing their earnings estimates begin to tumble. If only someone had told the bulls that a little earlier so we wouldn’t have had to suffer through the non-sensical (but very painful) rally of October and November! Wow, Lehman even downgraded XOM this morning!

Oil Bulls Got More Bad News In The Form of Rising Products Inventories:

  • Crude inventories fell 1.3 mm bls for the week, well off the pace seen in the prior two weeks which labored under a fog shuttered Houston Ship Channel. Though still a decline, the draw in crude was spun positively on CNBC by a guest oil expert. Not to belabor a point but his firm had called for surprisingly low crude draws in the prior two weeks and was looking for a build this week. Let’s just say that I think his motives are suspect. The “bullish” crude draw was quickly overshadowed by…
  • …Much larger than expected builds in both gasoline (5.6 mm bls) and distillates (2 mm bls-double expectations). CNBC’s guest shrugged this off as a lack of winter weather. Fine. In that case I’ll shrug off the two previous large crude draws he said had shown that the market is coming back into equilibrium as nothing more than a logistical glitch. And wait a minute…warm weather reduces gasoline demand? I don’t see that.

Note how quickly gasoline and heating oil inventories have pulled back to above average levels for this time of year. You can say it’s the weather but then there’s that pesky gasoline chart. Hmmm. Could it be that since the refiners decided to go back to work we’re catching up? I wonder.


  • Refinery Utilization had been low for an unusually long “maintenance season” but is now at 91% and rising. Margins are down and surprise, COP warned that margins are well below third quarter levels.

Oil Got Popped Again…Oil was off $1.50 before inventories but settled down $2.73 (for the second consecutive day) to $55.59. $55 is the obvious next test and although I really expect Opec to make a statement very soon so far they have been quiet. Maybe rebels or somebody else can help the bulls because it gets kind of hard to find support at this point. In fact, the February contract hasn’t had a weekly close below $55 since June 2005! Crude reversed slight gains overnight and is trading down to $55.25 this morning.

… And The Stocks Took It In The Shorts. The XOI, XNG, and OIH all made good progress toward the levels I wrote about yesterday morning.

  • XOI fell 1.9% to 1,128 and is now resting just below its 200 dma. Any move to the downside could result in an 1,100 test at which point, you could see a 80 point freefall to the September lows. This fall would seem to make sense when you recall that oil was nearly $10 per barrel higher in September than it is now.
  • XNG fell 1% but natural gas was flat on the day. At 427 the index has to fall to 390 to reach it’s late September lows. Gas is hovering just above $6 now but in late September, natural gas traded at $7.70, once again auguring for lower levels on the index, especially in light of the downward direction I believe gas is headed in.
  • Oil Service Got Slapped Again. The OIH fell another 2.5% to end the day at 130 but looks at a minimum to be headed back to its September lows of around 120. Below that and you’re into the fall of 2005 before you find any solid technical support. Quite simply, if commodity prices continue to decline, oil and gas companies will not be able to pay for oil services (less fraccing, less mud, less drill bits, less drilling etc) at present pricing let alone suffer the increases that they have been for the last four years.

Note To Readers. I realize that I’m talking about technical levels of support a lot recently but that’s because of the nature of a good portion of the dollars invested in the energy complex. There is an awful lot of funny or go-go momentum money in the group right now and those people rely primarily on charts. They don’t care so much about the company as about the stock. I feel it’s a pretty important distinction. Anyway, they act as a herd and when a group tires they move on. Fast. I think Art Hogan, market strategist at Jefferies and Co., summed it up best by saying, “It looks like technology is going to be the leader of this market in the first quarter. Even as energy is falling, money is going straight out of there and going into techs.”

Odds and Ends:

What Did T. Boone Pickens Last Say About The Price Of Oil? According to T Boone oil will average $70 per barrel in 2007. Did CNBC lose his phone number? Or is he a bear now but still accumulating his short position? He can just say he would have been right but he didn’t buy into the whole global warming thing. By the way, the Brits said yesterday that 2007 is likely to be the warmest year on record due to El Nino combined with global warming. Maybe Opec should see if they can convert some of their oil to sunscreen. Don’t get me wrong. T Boone is a legend and great philanthropist.

But How Much Does He Really Think Oil Is Worth? His company XCO just bought an asset package from APC last week paying the equivalent of just under $15 / barrel on a proved reserves basis. Yes they’re still in the ground but theirs also the probables which were probably sizable and the rest of the untouched acreage. Hmmmm. It’s always easier to drill for oil on Wall Street but how big of a spread does he think there should be? In fact, according to a writer at the Washington Post, Bloomberg ran a story (which I admit I haven’t found) about how Picken’s hedge fund made money shorting oil in the fourth quarter after repeatedly going on CNBC and touting higher oil prices (which I vividly remember).

Gas Inventory Day: Gas Withdrawal Should Be Up Slightly Over Prior Week But We’ll End The Year With Over 3.0 Tcf In Storage- A Record. Last week saw 165 heating degree days recorded vs 156 in the prior week. The distribution looks a little better for gas consumption. I’m guesstimating 70 Bcf and I haven’t seen a consensus number yet. Honestly, gas should be toast unless the number is just absurdly large.

  • We’d have to have a withdrawal of 132 Bcf (which is NOT going to happen- not even close) to save you from the headline. “Gas In Storage Ends Year At ALL Time Record Level”. We’ll probably get something between 60-100 which doesn’t even get you below 3 TCF.
  • Gas has been coasting for a few days now but should angle to the downside next week (or today if we get a number below 50).
  • This week’s HDD number for next week’s withdrawal falls back to 157. This mild weather is simply not supportive of gas over $6 in January.

Analyst Watch: Lehman cuts XOM from Buy to Hold over slowing production growth. Prudential cut EOG and CHK to neutral while UBS raised EOG to neutral.

SU Had A Strong December. 281,000 bopd oil sand production, up from 257,000 in November. This brings their 2006 average to nearly 260,000 bopd which is at the high end of their stated range. The company also said to expect average oil sands production of 260-270,000 bopd for 2007, in line with prior thinking. After the beating this stock has taken it will be interesting to see if a piece of unexpectedly good production information can rule of the pall of lower oil prices.

Thanks for reading everyone! I’ll be around all day but as always, have a great weekend. I’ll be adding a valuation table tab this weekend so when I say something looks cheap or expensive to me relative to its group or to its own history you’ll see what I mean graphically.


27 Responses to “Finally Friday 1/5/07 – Round 2 Goes To The Bears”

  1. Attacking Mid said

    Well, well, well…. guess who happened to be the owner of some MOT puts this morning. It wasn’t a huge position, but I love it when I get a gift like that.

    I know everyone seems to be expecting the overall markets to do well, but I’m concerned. I’m tempted to short some of the high fliers like AAPL and GOOG. Haven’t decided yet.

    I doubled up on SU calls yesterday, as Fridays tend to be up days for oil. I haven’t verified it, but it seems as if one could make a case for buying oil stock calls on Thurdays, flipping to puts on Fridays, then liquidate on Monday and wait for Thursday again.

    There are rumblings that BQI may be delayed in releasing their winter drilling results. It’s just a rumor, and BQI management has a fantastic track record of keeping its promises and communicating sparingly, but always when they say they will. For some of your speculative money, I’d recommend some April 5.00 calls. I have the Febs, but if this rumor is founded, it could delay a potential pop in the stock price.


  2. zmann said

    Congrats on the Mot AM. I just bot puts on UPL. Two strong days in the face of lower oil and looming low3er gas and a forecast that just got warmer. They’re very gassy, not all that well hedged, priccey relative to their peers. Not a bad company, just vulnerable right now.

    I’ll look into that BQI over the weekend

  3. zmann said

    My little anti alt energy/clean energy play in the PBW ETF is starting to work. If the mainline energy commodities are falling no one likes to pay the high prices for the premium clean fuels and processess. A bit of an oversimplification but we’re talking a high PE group that’s having it’s pricing power erode daily.

  4. gungagalonga said

    Ok, I’m throwing out a number based loosely on degree days, industrial demand trends and the attitude of my cat.

    62 bcf with be the draw.

    With the relative strength in nat gas lately, I wouldn’t be surprised to see it trade up today on any number.

    The late Jan arctic blast that Accuweather is touting (it should be renamed AccuBlast) could be just enough of a supportive event. The obvious reality is that it won’t be enough to save gas.

  5. Attacking Mid said

    I sold my UPL puts on Monday. I agree with your comments, but be careful…. that stock has defied gravity for a long time. Who knows, it may be time to crash down to reality. I’ve shorted that thing many times with limited success. I’m wrestling with whether to take any puts to play the gas inventory report. Better make up my mind quickly.


  6. Attacking Mid said

    Duh… I meant I sold my UPL puts on WEDNESDAY.

  7. zmann said

    SU really liking that December production data

  8. zmann said

    47 as expected by the street. Should be bad for gas. We won’t even break 3 Tcf threshhold next week.

  9. Attacking Mid said

    AM really liking that SU.

    I sold half my SU calls, since it was a double down, and the DD shares served their purpose of getting be back in the green more quickly. I’m considering an ITM straddle by adding Feb 75 puts (currently holding Feb 70 calls). I’d like to get ’em a bit cheaper though (dangerous words).

    Although I’ve liked holding naked puts over the past several weekends, this one is much different. I can imagine a further meltdown on Monday, but I can equally imagine a strong runup. Volatility is wonderful if you’re on the right side, but can be devastating if you guess wrong.


  10. zmann said

    Took some EOG puts on this pop. Looks interday toppy. Still an expensive stock.

    APC reiterated underperform at Prudential. Hackett is a great leader and his stock is cheap on fwd numbers but his timing was unfortunate on the acquisitions and his asset sales are being done in a buyer’s market.

  11. zmann said

    EOG gains on day cut in half.

    PWR edging closer to the abyss. Passing through $17 is key and we’re a penny away.

  12. zmann said

    PBW throug $17 and still falling.

    Crack spreads falling now as gasoline decline accelerates…down $0.20 on cash gaso in 3 days.

    Will update Crack spread page tonight along with gas inventory page…need an intern here.

  13. Attacking Mid said

    I also picked up a few UPL Jan 50 puts. Got a nice fill, so that was a bonus with the current bid almost up to my buy price of $3.87.

    SU never hit my offer on the puts, so I’m naked on the calls and back in the red slightly. Glad I obeyed my rules and sold half when they were higher.

    ECA may be another put opportunity if gas resumes its fall.


  14. zmann said

    ECA…was looking at their 6K yesterday and they must have some pretty high expectations for oil prices this year to reach even the low end of their cash flow range from their oil sands JV with COP. Definitely got my eye on them but am waiting for a bounce.

  15. zmann said

    Speaking of bounces. Check out XOM’s buyback program kicking in. $0.60 in 30 minutes with no move in crude or gas.

  16. Attacking Mid said

    Wonder why DVN is so strong today. It’s come down pretty hard, but I’m getting itchy to buy some puts on it.


  17. Attacking Mid said

    Any of the oil sands or bitumen exploration/development plays are fairly insensitive to oil price fluctuations. These plays are very forward-looking, so the investors are not concerned that oil might drop to $50 this year. They’re banking on oil being higher in 10 years (a premise with which I agree).


  18. zmann said

    Agree with you on your oil sands comment but for the economics of the deals…not the stocks. There is too much fast money in the group. Numbers are coming down as these high cost operations bump up agains lower average selling prices for their oil. It doesn’t threaten the companies’ ability to survive or threaten the project but the momentum money does not like falling CFPS estimates.

  19. zmann said

    Lots of things are strong today as people try to buy the dead cat bounce. The commodities aren’t moving and the moves aren’t very big given the drop. Everythings rising now on this oil pump. Just got stopped out of my MUR for a nice double in 11 days.

  20. zmann said

    You’re right. DVN looks a bit intra day toppy if you’re looking for DT. I’m a little nervous about holding near term oil puts over the weekend as Opec seems to be waking up to these lower levels with threats etc… But the DVN could make a nice trade today especially as the USO is likely to weaken into the close of NYMEX

  21. Attacking Mid said

    Yeah, that’s where I’m going to be sitting over the weekend. Looks like I’ll remain long on SU and short on UPL and ECA. If SU makes another run, I’ll get into that straddle.

    I’m also building my call position in BQI. Normally I like ITM options, but I’m going to gamble on BQI with the $5.00 calls. I can take a fairly large position and limit my downside with a significant upside.

    Good call on the MUR. When I dumped all my puts last Friday, MUR was my only (slight) gainer. Did I mention how happy I would have been if I’d held Friday’s positions til Wednesday or Thursday? 8^(


  22. zmann said

    Gas Storage Page updated.

  23. soccer_F1 said

    Great post, Zmann!

    I enjoy reading your daily comments.

    Happy New Year

  24. […] covers for today but inventories are shaping up to be a disaster for oil bulls this week.  See Zman’s excellent wrap-up on last week’s crude […]

  25. Ray said

    Clarification –

    What is the logic behind hyping oil to drive prices up while simultaneously shorting it?

    Are you saying the his hedge fund made some money shorting or were they shorting more than going long? If that’s the case it would make no sense for him to hype oil on CNBC.

  26. […] covers for today but inventories are shaping up to be a disaster for oil bulls this week.  See Zman’s excellent wrap-up on last week’s crude […]

  27. muqkw said

    Good site. Thank you!!!
    [12m.txt||1||r||3|| @]

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