Watchful Wednesday 1/10/07

Oil Had A Crazy Ride Yesterday. Oil dropped as much as $2.21 yesterday to a new interday low of $53.88 before recovering most of its losses to end the day down only $0.45 at $55.64. The chart still looks hideous and the reasons for its slide still remain in place:

• Too much oil in storage in the US and Japan and now apparently in Poland, Germany, Hungary, and Russia as well (hats off to Putin for inadvertently confirming that yesterday through his mulling of curtailing output). The last Vlad that caused this much trouble in Europe just impaled people in large groups – he didn’t threaten to let them freeze. Hopefully we won’t have to start calling Putin Vlad, the curtailer.

• Persistent lack of winter – I know it’s a season but maybe we can coin a new name for it. How about Spring, Summer, Fall, and Temperate? Seriously, every time I wear a T-shirt and shorts outside in January (and break a sweat) I feel like running back inside to go long OO and short ACAT. What greater proof do you need of global warming than faling sales of snow mobiles and rising sales of sunglasses? Just kidding. They’ll always need snow mobiles around Denver. By the way, forecasted temperatures for the weekend in the nation’s southern mid section have jumped about 5 degrees in the last two days.

• Opec continues to cheat. I’m not going over this again this week but here’s a long but very good article on Opec’s cheating ways, how Putin’s growing oil empire is frustrating Opec and how all that relates to oil, gold, and everything else.
  

• More sellers than buyers as the February contract breaks key technical support at $55. They will reassert their presence again when cross that boundary. Note how the chart fell apart at 6:00 EST yesterday – the volume for that time of day was size! Note also that rally on this side of the pond didn’t occur until the Europeans were safely out of the way. Oh look, the Europeans are awake again and oil is down $0.70 and toying with that $55 mark again.

CNBC did its share of pumping with guest after guest saying that this weakness is only temporary and that Opec’s recent cuts will balance the market. CNBC even cited our very own EIA as claiming that a disruption of oil supplies coming out of Opec could cause prices to rise as high as $65. Really? And if a comet hit the earth how much would prices fall on the surplus created by the fact that no one would be driving? Opec’s about as likely to follow through on its “cuts”. Whose side are you G-men on anyway?

No matter, everything rests on today’s inventory data. Surveys of analysts and traders call for:

• The expected change in Crude Oil inventories ranges from down 500,000 barrels (Bloomberg) to up 800,000 bls at Dow Jones – they really should try to call the same guys but obviously some outlier in the Bloomberg survey is trying to skew the game.
• Distillate Up 2 mm bls
• Gasoline Up 2.6 mm bls

Opec Watch: Rumors Swirl Like Robes In A Desert Wind. Lots of rumors regarding an emergency meeting. Lots of emergency phone calls. Lots of cross currents. Iran and Venezuela definitely want to accelerate cuts– since they didn’t abide by the last round of cuts and others did it must seem like a win-win for them. Qatar is rumored to be accelerating the Feb 1 cut to now but who knows.

Putin Watch: Man I Wish This Guy Had His Own Apprentice Show! In telephone talks with Belarus. Winter apparently is the time for applying leverage. Putin claims Belarus was siphoning oil from the ironically named friendship pipeline. At the same time Putin told his cabinet that Russia will lose $3.3 billion over natural gas agreements that were designed to favor Belarus and “support our Belarus colleagues.” So on the one hand Belarus is a thieving regime and on the other Russia is getting bent over support them? Just like the recent “environmental squabbles” at the Sahkalin developments that were pronounced clean and pure once Russia gained majority control of the projects I’ll bet that here a renegotiation of those oh so generous gas contracts yields a reopened oil pipeline.

Natural Gas Is Starting To Bounce… As I said yesterday, gas would punch back towards $6 if oil could hold it’s early morning losses. Oil rallied and gas, after managing only a nickel decline in the morning rallied to close up a completely idiotic $0.25 to $6.63. The rally, now up 10% in 2 weeks, is due to the blue stuff seen here making its way slowly eastward for the first time in nearly a month.

…But It Should Be A Brief Rally Before Tripping Below $6. Given: 1) the record amount of gas in storage at year end, and 2) the prospect of at least two more wimpy withdrawals to start the month of January I think this rally will peter out soon (heating degree days were only 147 last week and won’t break 200 this week either). Once the cold weather gets here and forecasts start to warm up again on the other side of it (as forecastors believe it will be fairly short lived) we should see gas fall back for a test and ultimate failure of the $6 level.

This is what’s got gas jumping: AccuWeather.com Chief Long-Range Forecaster Joe Bastardi believes that if the weather pattern reaches its full potential, the dramatic change from warmth to cold could result in “one of the top-five coldest 30-day stretches in the past half century“. Bastardi is predicting bitter colder from mid-January to mid-February and even commented that many natural gas stocks could spike as inventories correct themselves. He sees an end to or weakening of El Nino causing this shift in the jet stream. Shift or not he’s behind the rally in gas prices and he should know better than to talk about stocks – but, what do you know, he’s a regular guest meteorologist on CNBC. I especially like his comment that too mamy forecastors rely on models these days and not on history. Right, stupid computers don’t know nothing. Me feel cold coming.

Analyst Watch: BTU started at Buy at B of A (Ouch! for today but he really should have waited for gas inventories to drag it a bit lower. Still, I’m glad I rolled this one to the Feb 35s on Monday and may double when the dust settles). BP cut to neutral at Bear Stearns.

Holdings Watch: The XOI had a pretty bad day considering the recovery in oil prices. Aside from XOM, all of the majors were off heavily in the morning and those lows carried through in the afternoon. —Aside: Yes I’m a bear at present but I think XOM‘s buyback program, flagging though it may be is not the only problem for shorts with that story. The real problem is the vaunted, safety stock status XOM has been granted by the Street. — While some mid and large cap E&Ps managed to break even on the day, their trading volume was well off average levels. Conversely for those names that remained down all day volume was high.

• XOI – down 1.6% today to 1,116. 1,100 is your next critical test with the 50 and 200 dma ‘s left behind at 1,180 and 1,133 respectively. That grey candlestick skulking around at the bottom of the chart is oil (USO). Thanks to Lou last night for pointing out that another major, CVX, just warned for the fourth quarter. That won’t help this chart and if oil cooperates could be the impetus needed to give us that 1,100 test. Also note in the chart below how the late morning rally failed when the XOI bounced off the 200 dma from underneath.

From a longer term perspective the XOI (Big Oil) looks to be running out of steam. I threw in the USO ETF from inception last year for perspective.

And Valuations Appear Stretched. The XOI is composed of 13 large cap, mostly oil focused stocks. From APC to XOM it is a whose who of mega cap energy names. I’ve added a Value Page ab(see top of blog at right) and will continue to add long term forward valuation graphs for select energy companies and (later) groups of companies. For now, suffice it to say that valuations, while not exceeding expensive for your run of the mill stock are pretty “up there” for the energy group.

Odds and Ends: If you haven’t seen “the absolute coolest thing ever“, at least this week anyway, you really should. My brand new 30G V Ipod looks so 2006 compared to this! I dare you not to play the demos. Note: if you have a ROKR forget what I said and do not click on the above link- you don’t need that kind of frustration.