zman’s Energy Brain

oil, gas, stocks, etc…

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Testy Tuesday

Posted by zmann on January 16, 2007

Ahhhh, It’s Good To Be Back! I hope everyone had a great MLK holiday!

Oil Is Softening A Bit This Morning. Down $0.91 in electronic trading to $.52.08. Don’t be greedy. If you still have January puts this could provide your last chance to roll out of them.

  • It finally got cold but it needs to last. Forecasters have been calling for a cold blast for mid January for over a week now and here it is. Now it needs to stay cold for at least two solid weeks to make up for some of the tropical weather we enjoyed around the holidays.
  • Certain Elements of Opec Are Demanding Further Production Cuts. However, since October, Saudi Arabia has cut more barrels than the combined cuts of the remaining cartel. In December Venezuela and Iran, the two staunchest advocates for the prior two rounds of production cuts, actually registered production increases. Saudi seems to be on the fence this time having borne more than their full share of price support efforts in the past. What that’s phrase? Fool me once shame on you…fool me twice…don’t fool me again. Words to live by Saudi.

  • And Opec Crude Shipments Are Actually RISING Now. Dow Jones reported that tanker tracker Oil Movements said crude exports from OPEC countries are expected to rise 350,000 barrels a day to 24.5 million barrels a day in the four weeks ending Jan. 27, despite OPEC’s announcements to reduce production by 1.2 million barrels of oil a day starting last November.
  • And Finally Opec Seems To Be Shying Away From Another Emergency Meeting. According to AP, an official at Opec’s Vienna headquarters who asked not to be identified because she was not authorized to comment, said such a meeting was unlikely… at least for this week. Surprised SHE answered the phone at all.
  • Venezuela To Nationalize ‘Absolutely All’ Of Its Energy Sector. This should actually support oil. The last remaining un-nationalized oil region in Venezuela was the heavy crude rich Orinoco Belt (reported to be the world’s single largest hydrocabon deposit). Chavez has been anything but good for Venezuelan oil production. Since Hugo took office in early 1999, oil production is down 470,000 bopd or 16%. That’s a lot of Bolivars. Meanwhile, Opec production was up 7% over the same period. Maybe Chavez’ call for cuts has less to do with posturing and more to do with saving face since he simply can’t make his quota.

vz-vs-opec.JPG

  • Who Gets Hurt Besides Venezuela’s Citizenry? BP, COP, CVX, XOM , and TOT. They’ve been given the option of retaining minority interests in their own operations (the state run oil company PDVSA had held an average 40% stake in all the major oil company JVs as of last Friday. What’s more, producers have been told to cut production yet again. Gee thanks! What a deal! Where do I sign? Oil companies were heard to say none of the preceding. REP on the other hand has already announced its immunity to the new Bolivaran order taking place in Venezuela and it could benefit greatly from any firesales conducted by the other majors who are just fed up (XOM) with the country.
  • By the way, that production slide in chart above was managed with the help of the previously stated big five plus Statoil. Imagine how steep it will be without their technical expertise to upgrade all that sludge. Oh well. Here are just a few examples of projects that the big five helped develop in the Orinoco which in aggregate produce 600,000 bopd and on which the big five are now getting the shaft:

vz-oil-vs-exxon.JPG

  • CVX Refinery Fire – Impact Unknown. Chevron reported a small fire at its Richmond, CA refinery which has been extinguished. These could provide early, but I’d expect very fleeting, support for gasoline and heating oil unless it turns out to be a multi-week outage. CVX should have more on the fire’s impact later today.

Natural Gas – After a 7% data-based tumble on Thursday, traders managed to whip themselves into a fundamental state of denial Friday. I think they saw what an awesome time the boys over in the oil pit were and just couldn’t stand to be left out. This induced a 3Tcf sized blind-spot in their vision allowing them only to see the BUY button on their terminals. And buy they did rallying gas 2/3rds of the way back from Thursday’s slaughter. Some things to keep in mind for the coming week:

  • HDDs this week were 180, slightly ahead of earlier estimates but still 20% fewer than normal. This will be the second highest degree day reading this winter after the week ended December 9th when degree days totalled 215 and 168 Bcf were withdrawn from storage.
  • Coincidentally, the coming week’s HDD estimate from the CPC is 215. If we get 168 Bcf next week then you know the whole game is rigged!

CFTC Data Shows Tide Is Turning For Gas Shorts. While gas was only off one of the past five trading days, the net position in Nymex gas fell by 10,000 contracts (lost 5,000 longs and added 5,000 shorts) to reach net -16,000, its lowest level since may.

cftc-010907.JPG

Holdings Watch: Make no mistake. For the stocks everything hinges on the direction of oil right now. I have a few remaining January positions (do what I say, not what I do) but for the most part I’ve rolled to February and longer. Friday was disappointing and I was too stubborn to ditch most of my remaining Januaries since they’re all very near or in the money and I just didn’t believe the action would last. Even my favorite whipping post MUR was up and they pre-announced numbers that were so low to the Street you could have sailed a VLCC through the gap! I’m into February and beyond on coal stock puts and if I don’t write about coal any more this week it’s because of a lack of fresh data from the EIA. Anyway, on to the numbers.

XOI – May get hurt a little early this week as several majors get grazed by Hugo’s greed (and utter lack of foresight). However if oil rallies significantly all bets are off. Technically speaking the chart should bounce lower off 1,130 (just 3 points above us) and head back to test last Thursday’s low of 1,093. As such I’ll be losing the Januaries if we sustain 1,130 more than just briefly. Fundamentally I expect two or more large cap or major warnings this week with the approach of earnings season combines with the apathy of analysts.

XNG – At 430 adn wouldn’t be at all surprised to see 440 before turning down later this week. At present weather forecasters are expecting a slight warming towards month end but if this changes gas will breach $7 and the XNG will rally over 450.

OIH – Expect warnings from onshore and shallow water drillers to increase. We’re at a critical level on the OIH and any close over 133 will cause me to enter into February puts on BHI, some of the land drillers, GSF, and several other favorties.

Analyst Watch: Analysts remain defiantly bullish. Cantor cut tankers OMM and GMI from buy to hold.

Odd & Ends:

Orange Juice Crop – Frozen Before It Went In The Can. This weekend the other OJ got some very bad news. According to Accuweather the California citrus crop was subjected to a freeze similar to the one in 1990 which destroyed 85% of the crop. Now we’re all apple juice and milk people around here so we’ll be fine but to me this looks like a textbook base breakout. For those of you with futures accounts who don’t want to chase it I’ve noticed that in the past class III milk usually moves well on big moves in OJ. Everybody drinks one or the other.

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22 Responses to “Testy Tuesday”

  1. zmann said

    Ramana – let me look at the bills and get back to you. Generally some types of alt or clean energy companies benefit more than others from these kinds of bills.

    In general I don’t like the alt plays right now and am in fact short the PBW ETF which has most of the big names in solar, batteries, clean coal etc in it.

    Many of these plays are simply low margin enviro tech companies. When oil, gas and coal all fall it gets harder to justfiy switching to say, a manufactured brick of clean coal that now looks comparatively expensive.

    But I will look into it becasue the bills generally offer incenntives to consumers and/or tax credits to makers and I just haven’t read the latest House Bill to see which direction they’re leaning this time.

  2. zmann said

    Oil Speculators (hedge funds) Just Went Short.

    Bloomberg. Bets by hedge-fund managers and other large speculators on falling prices outnumbered contracts to buy oil by 22,358 contracts on Jan. 9, the largest number since February, according to Commodity Futures Trading Commission data. A week earlier, funds had been net-long 2,194 contracts.

    That’s a huge swing. Once short they’ll want to make a little green so you’ll probably see less of the sudden rallies into close of Europe and close of Nymex.

  3. Attacking Mid said

    BQI announced excellent drilling results this morning http://biz.yahoo.com/iw/070116/0203532.html , and I expect the stock to climb some from here. I have been trading this stock for about a year, but a more conservative investor would likely do well to buy on dips and hold for a year or more. Today’s drilling results are further evidence that BQI is potentially sitting on a large bitumen deposit. If further drilling proves successful, the likely scenario is that BQI will enter into JV’s to enter the development phase, or they may become a willing takeover target.

    I am sitting on a pile of $5 calls – mostly Feb – which I plan to try to roll to April by selling the calls on a spike up, then buying the Aprils after a pullback. I’m hoping to accomplish this action this week, as we should see increased volatility.

    BQI’s website is http://www.oilsandsquest.com

    AM.

  4. zmann said

    Congrats AM! – Sounds like they’ve got homogeneoty over a huge area. I may have to pick up some Feb or later $5 – they should run if oil gets its feet under it but I with those call spreads I’ve got a little time to figure it out. This morings move pushed it over the 200 dma but it may gap fill all day on neg oil.

  5. zmann said

    BTU rolling over nicely. I guess after 3 upgrades last week the Street has shot their bolt.

  6. zmann said

    Saudi oil minister rejecting further cuts (like I was betting in this moring’s post, oil retreating, and still Wall Street obviously trying to recommend the group out of this hole. That pretty much kills an emergency meeting (and oil) and yet most of my screen is now green.

  7. zmann said

    XOI Attempt #1 at punching through 1,130 failed. XLE feb 55 puts look pretty attractive at $1.40. USO is staring at new LOD.

    Even XOM appears to have run out of steam earlier than usual this morning.

    Tankers: FRO is up on Saudi comments. OMM would be but for that downgrade.

    There goes oil. Feeling more confident I’ll get an exit for remaining Januaries in next few hours. Gotta go grab those Feb XLE’s.

  8. ramana said

    Thanks Zman

  9. zmann said

    Oil getting slapped now. USO within $0.20 of all time low set Friday. Down $0.86 on high volume.

    Sector looking a lot worse after the 3rd failed early morning rally in 4 days.

    MUR hitting new LOD
    UPL weaking quickly

    TSO only refiner up but falling off
    HES still up but only slightly – this one’s time is up I think. Virtually no sell off with the group over last 30 days.

    XOM suddenly down almost a buck
    BHI getting cracked

    Still holding those few remaining Jan’s

  10. Attacking Mid said

    Most energy stocks are holding up surprisingly well considering the drop in crude and XOM. If both stay down, the others will follow soon.

    BQI gap was nearly filled (within 6 cents). I still expect further strength as the day goes on. Tomorrow more likely to see a pullback, as followers of this stock will want to see what CEO Chris Hopkins has to say late this afternoon at a Canadian Oil Sands Conference in Calgary. I really like the management of this company.

    AM.

  11. walter said

    Thanks for the updates on oils and refiners- much appreciated!

  12. help said

    Nice ..If oIL dipped below 50, it will cover for the wrong hand played on Friday

  13. zmann said

    Forgot to mention EOG and UPL in morning comments. SWtill have those puts and still like them lower.

    ————————–
    AM – It’s unbelieveable how well the group is holding up. There are a lot of analysts who keep touting how cheap the stocks are but are they really? Numbers are coming down and if there’s no bounce from here many E&P’s will see ’07 numbers halved.

    Strong management is key. Let us know if you here anything out of that conference. Don’t some of those plays lose (at least on a short term basis) economic viability in the $40/barrel range?

    ————————–

    Thanks Walter! If you’ve got any specific ?s please feel free to fire away. Looks like everybody slept in today or just don’t feel very talkative. Hit me with some questions or suggestions. Thanks!

    ————————–

    Wow, there goes the USO legging down to a new all time low of $43.37. If it’s capitulating, and I don’t know what else you’d call this, how far behind can the stocks be from a similar event?

    —————-

  14. Attacking Mid said

    Yes, somewhere in the $35-$40 range is the estimate for the point of economic viability. The reason BQI (and some of the other Oil Sands exploration plays) are relatively unaffected by oil price swings, is that these plays are very forward-looking. BQI is probably not looking at entering the production phase for at least 5 years, as its acreage is literally in the wilderness of Saskatchewan. They have makeshift worker camps established for now, but real infrastructure development will be necessary to begin production.

    AM.

  15. Jamie said

    Ahhhh Zmann, XOM is a thing of beauty!!! Jamie

  16. Attacking Mid said

    Doubled down on my EOG and UPL puts (EOG earlier, UPL just now). Wanted to do it on Friday, but I was already loaded enough given the risk of holding over a long weekend. Even the Feb premiums seemed to take a good hit, as I’m still underwater a bit from Thursday’s buys.

    My AAPL play isn’t working for me. I sold the puts and flipped to calls for tomorrow’s run into earnings. Will watch the action on Thursday morning and decide whether to leg into a straddle or possibly flip back into puts. I expect volatility in the coming weeks & months.

    AM.

  17. zmann said

    Hey did the view of my site just change dramatically?

  18. Attacking Mid said

    Not that I can see.

    I’m a bit surprised BQI hasn’t moved up stronger. There are a few investment newsletters that follow it, so perhaps as those guys tell their readers what this news means, there will be some follow-through buying. Volume was very high this morning, but has all but died now.

    I need some downward movement so I can take some put profits. I’m all in at the moment.

    AM.

  19. zman said

    Thanks – I had cached a bad style sheet. All better now.

    Here ya all in. Oil looks lousy. It’s sucking the life out of what would have been a good day for your BQI.

    Hear ya all in on puts. MUR is trying hard to crack $46 and if it does I think it rolls much lower quickly. The mom-mo guys in energy right now have a habit of bailing once the round numbers are breached.

    On another topic I can’t stress enough how important the short trade in crude is. If hedge funds have been propping this market up for years than they are profitable on oil well below these levels. These guys act as a herd so lower oil is almost inevitable. First a $50 test which we may get this week. If it doesn’t hold that then Katie Bar The Door…here comes $45. Come to think of it the Saudis may be keeping their powder dry because they know the hedge fund move is serious and lower lows are inevitable.

  20. Attacking Mid said

    Who’s Katie? ;^ )

    AM.

  21. zmann said

    Neil – regarding news sources.

    For the stocks my trading platform provides me with lives feeds from AP, Reuters, Dow Jones.

    For breaking news I continually run Google news searches during the day on oil, nat gas, opec, nigeria, etc…

    Hope that helps and I’m glad you like the site!

  22. zmann said

    Thanks JJ,

    Updated crackspread info can be found at the following address. Warning: it’s a very slow to open PDF on the Tesoro website:

    http://www.tsocorp.com/stellent/groups/public/documents/published/tsi_inv__industrydiff.pdf

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