zman’s Energy Brain

oil, gas, stocks, etc…

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Tuesday Morning – 1/9/07 – Energy Going Lower

Posted by zmann on January 9, 2007

Oil Is Plummeting In Pre Market Trading.After a pretty weak attempt at a rally yesterday morning oil closed off $0.22 to $56.09. In early morning trading it’s down $1.73 to a new low of $54.21.  The slide this morning is so far being attributed believe it or not to warm weather, doubts about Opec cuts (see below), and they possible cessation of the blockade of Russian oil going to Belarus (and thereby Germany and Poland).

Inventories Expected To Rise According To The Latest Bloomberg Survey: Normally  I’d say the following estimates are insane for this time of year and I do think the crude draw will be bigger but the other two really aren’t so rigged as to be obvious. There’s just so little weather bases demand and with refining cranking back up they are reasonable.  And the survey estimates are:

  • Crude Oil down half a million barrels
  • Distillate Up 2 mm bls
  • Gasoline Up 2.6 mm blsl

Opec: Once A Cheater… According to another Bloomberg survey, Opec output fell by 245,000 barrels a day last month and declined 550,000 barrels in November. Comment – That’s a far cry from 1.2 mm bls gentlemen of the cartel. That’s less cohesion than Ohio State’s offensive line last night! Saudi, if I were you I wouldn’t should the brunt of the cutback to support Iran…they’ve got a big army you know. That’s just me you do what you want but word has it they’re buying military hardware with those excess petro dollars. They can’t be worried about the U.S., we’re busy. Anyway…

Gas  Continues To Tread Water. Gas traded up $0.19 to $6.39 with oil on the hopes that an approaching cold air mass will prompt the first bit of serious demand this winter. This morning it is up a penny in the pre market but if the losses hold or build for oil today I’d expect we’ll get another shot at $6. Gas prices have been flat and then slightly up over the last two weeks despite the fact that only 93 Bcf of gas was pulled from storage in the back half of December. Average demand for gas in December general results in 450 to 500 Bcf being withdrawn over the month.

Analyst Watch: SJT from hold to Buy. I will buy puts on this (no matter the spread) if it pops. It’s a pure royatly trust completely dependent on the price of gas yet AG Edwards put it on the buy list. They also updraded HGT to Buy, another RT. BEXP goes from over to underweight at JP Morgan.  No stop in between means they messed up or ticked off the analyst. REP downgraded to Sell at Deutsche Bank.

Ratings Comment – The shear lack of names on the my daily analyst watch list over the last several months points to complacency. It tells me that Wall Street is building up an avalanche of downgrades but doesn’t believe commodity prices will force them to actually publish. While they aren’t really upgrading lots of stocks  the lack of downgrades and accompanying price target reductions is deafening. Silence is deadly.
Holdings Watch: Added back the BTU and doubled my APC position with some $42.50s to add to my $40s. Also added some OIIs on Phil’s suggestion – it was up 5% and was just too tempting to pass up.

Odds & Ends:

GE Buys Privately Held Oil Service Firm. I find this interesting both strategically and from a valuation metric standpoint. Pointing out strong global demand for energy,

  • General Electric Co. said yesterday that it agreed to buy oil services company Vetco Gray Inc. for $1.9 billion from a group of private equity funds. Vetco Gray provides drilling, completion and production equipment for oil and gas fields.
  • The business is forecast to generate more than $1.6 billion of sales in 2006. So it’s being purchased for 1.18x sales.
  • The market is valueing other service firms a little more: SLB (3.9x), BJS (2.6x), BHI (1.8x), and HAL (1.3x).
  • Based upon the multiples above it looks like GE got a pretty good deal. This would almost be a buyunder had Vetco been public. Not a good sign for pricing in the service sector if the private equity firms (including JP Morgan) let this one go so cheap! Maybe that’s what this chart of the OIH is telling you.
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25 Responses to “Tuesday Morning – 1/9/07 – Energy Going Lower”

  1. help said

    Hi,

    zmann, quick question – I hve purchased 100 shares of aapl at 86.05, sold 85 call option at 3.5. It is at 4:20 right now

    What is my profit/loss if I exercise it now vs if it jumped to 90 etc. what is recommended ?

    The million dollar question – would it be a good time to convert it to cash & but XOM puts?

  2. zmann said

    Dow Jones AIG and Goldman Sachs commodity indexes announced reduced energy weightings.

    Russia is talking production cuts in a threat I think meant to tell Belarus it’s serious. Russia has limited refining and storage capabilities so it said it needs may need to cut production very soon. This tells me their storage tanks are as full as ours.

  3. zmann said

    Sorry but don’t know much about AAPL except that I like my Ipod.

    This guys is way in the know on it http://www.philstockworld.com

    As to oil puts, longer term is better than near because of the recent dip but I really believe, and valuations support this, that we have quite a bit further to fall.

  4. zmann said

    XOI going for the 1,100 test mentioned last week
    XNG down 1.3% this morning, within 2 pts of its 200 dma
    OIH off 1.8% and in free fall

  5. Attacking Mid said

    help,

    First, let’s get the terminology straight…. when you sell or go short an option, the only person with exercise rights is the guy who bought the option or went long. I assume what you meant was, should I close out the option position buy buying it back at the now higher price.

    I assume you sold a Jan call, so you have fewer than 8 trading days before it expires. Here’s your simplified decision matrix:

    1) If you think AAPL will go up significantly before expiration, then buy your option back and keep the stock (heck buy some calls while you’re at it).

    2) If you think AAPL will be relatively flat, you should keep your position and either a) let your stock get called from you, or b) buy the call back on expiration day when all the time value has eroded from the option.

    3) If you think AAPL will go down significantly before expiration, then sell the stock and keep the option or switch to a long put position.

    I hope that helps somewhat.

    AM.

  6. help said

    Thx AM. since it is too volatile I bought back the call at a loss & then sold AAPL immediately. while I am guessing it might go up enouff there might be selloff later so I did not want to take chances especially with OIL puts looking tempting.

    I probably should hve kept it though, my OIL puts are in the red for now

  7. Attacking Mid said

    Volatility is what makes a covered call write worth doing.

    Be careful with the oil puts…. there’s likely to be even greater volatility there.

    AM.

  8. help said

    I know. Hopefully it will be volatile enuff to make some profits. I am long long long overdue

  9. help said

    aapl volatility I meant – uncertainity. Like last time if there is an disappointment with AAPL & it tanks 5-10$ I will be at a loss even with the covered call.

  10. help said

    CNBC – OPEC actually increased production?

  11. Attacking Mid said

    I don’t want to come across as condescending, but my impression is that you’re relatively inexperienced with option trading. So was I a few years ago. We’re all here to help one another make money, so my intention is to help you make, or at least avoid losing much, money.

    I would just urge you to keep a couple of things in mind that I’ve learned the hard way regarding options:

    1) While options can make you money in a hurry, they can lose you money even faster.

    2) The oil market has a nasty habit of reversing directions when you least expect it.

    Good luck,

    AM.

  12. zmann said

    I’m back…Nice day.. I would second and third AM’s cautionary comments. I worked on Wall Street in research and portfolio management functions. Research is easy. Good analysis is a bit more difficult. Making money in options based upon the analysis requires time, money, good timing, and more money. Excercise caution and move in slowly. I’d rather average up than average down on an option position any day.

  13. walter said

    Attacking Mid, that is a good advice. Your option comments are always welcomed!

  14. Attacking Mid said

    Thanks Walter!

    I’m mostly cash after selling all my UPL and ECA puts on the early downdraft. Nearly pulled the trigger on some SU calls when it breached 70. However, I got a bit apprehensive with the ease with which it breached 70. It’s back up to nearly 71 now, so it would have been a good trade. Still better safe than sorry in this environment.

    I’d like to see some of the gas stocks have a nice rebound before getting back into the puts.

    I’m not trusting the oil stocks right now. If we get more carnage, I will start building call positions. Oil will be back sooner or later, IMO.

    AM.

  15. zmann said

    Oil pulled out of a death spiral after Europe closed. I don’t trust this move for even short term call buying. There’s less reason for oil to rebound than for it to have fallen yet here we are almost even on the day.

    Apparently OPEC is promising to implement the Feb cuts as of today. I’ll believe it when…nah, I just don’t believe it.

  16. Attacking Mid said

    The January plunge in many oil stocks was exacerbated by sector rotation. My guess is that the brunt of the sector rotation effect has already happened (though not entirely). I think it is still widely believed that oil is heading higher in the long term (remember what oil stocks did in 4Q of 2006), so we may not see the oil stocks go as low as one might think. Therefore, my thinking is that plunges can make good call buying opportunities. I’m just not convinced we’re done going down in the short term (though it’s possible).

    I feel more strongly about the potential for more weakness in the gas market. That’s why I’m awaiting an opportunity to get back into gas stock puts.

    JMHOICBW,

    AM.

  17. zmann said

    On the gas side: look at the royalty trust SJT – it’s up $1 now on an AG edwards upgrade. Bad spreads for options but they’re worth it if you go out a few months. It’s a pure play on gas prices. No exploration. Just flattish production from the San Juan Basin – BR’s old stomping ground before they got picked up by COP. It simply moves up and down with gas but the buy rec today is really boosting it. I think gas goes to $5 over the next month.

  18. Attacking Mid said

    z – I looked at SJT, but I don’t see how you’re going to play those options very easily. I’d be curious to know which puts you’re buying and how much you were able to get ’em for. Those options look REALLY inactive.

    AM.

  19. zmann said

    Look at the April 30s. Huge spread but what are you really paying, $1.50? on the offer. There’s a little volume there and you’ve got 3.5 months to fall $2.

  20. zmann said

    Interesting to see the XOI is off over 1% still today. My screen looks a lot greener than that. Or at least not that red. Then you look at the majors and they’re all getting popped like oil broke $50 save XOM. The rest of the smaller energy stocks take their cues from the price action on Exxon so when it rallied they took off. But not the majors.

    Just interesting and it goes along with my theory that XOM is a bad short in a very shortable sector since it’s seen as such a Dowy, safety stock in times of uncertainty. Just a thought.

  21. Attacking Mid said

    I’ll try it with some funny money. I raised the bid on both the Feb and April – we’ll see if I get anything. That chart was in its own death spiral before today!

    I may be a fool, but I’ve started nibbling at AAPL puts. They carry a lot of premium, so I’m starting small (as in one contract small!) of the Feb 95’s. If the run continues tomorrow, I’ll triple up, then I’ll probably sit on it for a month or more (I always think that, but never do.)

    AM.

  22. zmann said

    I’ll remind you. Have you been to the Apple store today?

    http://www.apple.com/iphone/

    That’s the coolest piece of must have $400-$600 personal tech I’ve seen since the orignial. I’m not giving advice because I really don’t ever do that anyway but I think the small start is wise. Especially if the market continues to be troublesome people could just flood into smaller names or take it on a technical run to $100.

  23. Attacking Mid said

    I dare ya to buy calls ;^ )

    I’ve certainly been wrong on things like this before (thus the cautious approach), but I don’t see a huge market for a $500 – $600 phone. Whom will this device appeal to in mass? Not the business market, not the teen market (most parents won’t spend that much for their kids’ phones), so you’re left with the Gen-X techies. I just don’t think the numbers are going to be huge. We’ll see how much Cingular is willing to subsidize the cost in order to gain subscribers. That’s the only way I see this thing selling in huge numbers.

    As I said, I’ve been way wrong on this stuff before, and I may be again. We’ll see…

    Have a great rest of the day everyone,

    AM.

  24. Lou said

    And for tomorrow: Chevron-CVX sees Q4 hurt by commodity prices, lower downstream margins.

    Chevron Corp. (CVX) late Tuesday issued its interim update for the fourth quarter of 2006. Relative to record third quarter earnings, the company expects results in the fourth quarter to be adversely affected by lower commodity prices, lower downstream margins and lower refinery utilization attributable to planned maintenance and construction activities worldwide. CVX said U.S. crude realizations decreased by $11.72 per barrel – in line with the decrease in WTI and California heavy crude prices. International liquids realizations declined $11.05 per barrel, in line with the decrease in Brent spot prices. U.S. natural gas realizations declined $0.51 per thousand cubic feet – less than a composite of bid-week price changes for Henry Hub, Rocky Mountain and California border, due to the mix of production in the various regions and spot sales.

    What do you think Dr. Z, could it be contagious?

  25. zmann said

    Thanks Lou!

    COP did this last week and you’ve got to figure estimates are coming down for the whole group. May or may not have much of an impact but it should. I put up a few valuation tables (just 3 for tonight but CVX was one of them) on a tab at the top of the blog entitled valuation. Historically (last 5 years )they’re expensive.

    Thanks much for pointing this out, I missed it this afternoon.

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