Exculpatory Clause To Today’s Generally Bearish Comments: Watch out for a potentially large bounce off $50.00.!!! If we don’t knife through it the bounce could be very painful so watch your puts.
February Crude Closed Yesterday At $51.15 Down $1.85. Just in case someone on wants to know you can tell them that:
- Year to date, the February crude oil contract is down $9.84 or 16%. That’s a 20 month low. In fact, it looks like we’ll see a $50 with 2 zeros after it today.
- Moreover, gasoline which fell $0.06 (4%) yesterday, is off an eye-popping $0.30 or 18% this year.
- And heating oil. Who needs the stuff? HO is down $0.17 (10%) year to date.
- Then tell them that although we’ve probably witnessed most of the near term damage to crude, although you think it might fall as low as $45 before sharply rebounding, the energy stocks are in. Ah the resilient yet slowly yielding energy stocks. They have not yet, you’ll point out, fully discounted said commodity –rout.
And wallah! You’re me. At a dinner party, barbecue, (insert event here) boring people about the energy markets. Hey, I love this stuff. Especially the part about having been negative on the commodity and the group since September. Check the archives if you don’t believe me!
Opec Watch: Saudi Oil Minister Ali al-Naimi told reporters at an oil conference in India that the market is “significantly healthier” now than it was in October, when OPEC agreed to cut output by 1.2 million barrels a day, Dow Jones Newswires reported. Told you the Saudi’s are tired of bearing the burden.
Fimat Watch: “Certainly the prospect of colder weather and short-covering prompted some buying last Friday,” John Kilduff, an analyst at Fimat USA, said in a note to clients. And “al-Naimi’s comments that OPEC’s current measures are ‘working well’ and that there is ‘no need to panic’ are just as certainly working on sellers … as well.” But “OPEC will probably still come forth with some action or at least some lip service to stem the slide in prices,” he said. Man this guy just can’t let it go! Lip service? You mean like what you’ve been spouting for the past 5 months? Seek help dude.
People Are Looking For Hedge Fund Implosions Ala Amaranth. As Amaranth did as a result of the decline in natural gas prices, so too will (insert hedge fund name here) do for oil. There have just been too many contracts on the wrong side of the trade. When the news breaks you have a only a few days to cover those puts.
Holdings Watch:
- XOI: The index reached nearly 1,129 (just short of my 1,130 worry level wheh!) and then retreated all day on oil. The group continues to shrug off the demise of that which they sell:
Three Reasons Why This Variance Won’t Last. Even if oil stops dead in its tracks tomorrow and holds in the mid $50s through the end of Q1 the Majors and E&Ps are all extremely likely to see lower levels:
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- Sequential oil price declines are the worst in 15 quarters! Not since the end of 2002 has fallen so far so fast. Oil was topping out between 2Q and 3Q06 and as such average prices were similar when 3Q results hit the tape. Not so for the fourth quarter. I expect a 4Q warning any day now from XOM which reports February 1st (not how the estimates haven’t fallen an iota!) MUR, CVX, and COP did it. Come on Exxon, give in to reality and post those lower numbers! It’s Ok, everbody’s doin it!
- PV10’s are going to be off substantially. In 2005, the benchmark prices for oil and gas were roughly $64 /barrel and $9.50/Mcf respectively. Those year end prices are used to calculate the SEC PV10 reserves of both majors and E&P companies. This year the numbers used will be closer to $56 and $6.20 for oil and gas. Those are pretty hefty declines.
- Finally, such variances never last. It may sound flip but it’s true. Right now owners of these stocks are clinging to the hope of a commodity price recovery while telling themselves that the stocks are historically cheap. Meanwhile the momentum players have turned in the coat tickets and are inching towards the door.
- XNG: Gas was up, then down, then up. XNG closed exactly flat at 430.47. I doubt we’ll get much of a move until later this week unless gas can test and fail $7 or oil breaks down. I really don’t see gas going much higher than $6.75 and any hint of a warming trend should send gas reeling towards $6 again. In that event look for the XNG to re-break its 200 dma to the downside at 423.66. In that case I’ll be adding to February puts on APC, EOG, and especially UPL depending on what oil is doing at the time of course.
- OIH: The service stocks traded quietly today while the bashing of the drillers continued. Rigs are being freed up onshore and weakness is becoming more widely expected in the shallow waters of the Gulf of Mexico. Continue to like puts on PTEN (which has enjoyed a 10% rally in the last 4 days), and will be talking a hard look at PDC and PDE on any significant strength.
click to open.Analyst Watch: TSO upped to outperform at FBR (anticipating a bounce off $50 are we?), PVR cut to neutral at Lehman. Other than that more apathy.
Odds and Ends: Cold Ruins Nearly $1B of Calif. Citrus. I hate to repeat myself but like I said yesterday, it’s time to buy milk folks.
zman's Energy Brain 