zman’s Energy Brain

oil, gas, stocks, etc…

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Wednesday Morning – Lookout Below!

Posted by zmann on January 17, 2007

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:

  1. 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.
  2. Moreover, gasoline which fell $0.06 (4%) yesterday, is off an eye-popping $0.30 or 18% this year.
  3. And heating oil. Who needs the stuff? HO is down $0.17 (10%) year to date.
  4. 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:

xng-vs-uso.JPG

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:

    • 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.

011707drillers1.JPGclick 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.

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12 Responses to “Wednesday Morning – Lookout Below!”

  1. zmann said

    I thinks that’s an ill-fated upgrade on TSO. Today just isn’t the day to risk that kind of thing and with the stock up just over $2 I’m looking at some Febr 70 puts for a quick trade.

  2. zmann said

    Stocks look like they wanted to go ahead and discount a bounce off $50 but we never got to $50. Now the $50 mark is lurking in the background.

    These morning rallies, though painful, are getting shorter and shorter lived. It gets harder for the sellside to convince buyers that “this time it’s going up” when four out of five times they end lower on the day.

  3. WDKING said

    He Z!….Great post as usual

    What is XOM on, and how do I get some?

  4. Attacking Mid said

    I may have to take some of those TSO puts if I can free up some cash elsewhere.

    I may not be the world’s most well-traveled person, but I have never in my many years seen a Tesoro or a Mirastar station.

    AM.

  5. zmann said

    WDKING – No kidding! XOM high on the morning pump. My question is “is it wise to discount the bounce off $50 when it hasn’t happened yet” I’m still holding some January puts for the test. If you watch the XOI you’ll notice it is trading well off today’s highs.

    LOL AM! Texas, Hawaii, West Coast. Their cracks have held up better than most but that’ll change if gasoline prices keep tumbling more than oil.

  6. ramana said

    Zman…another gem.

    — Ramana

  7. zmann said

    Thanks R – hope you find it helpful or at least worth the occasional chuckle.

    These morning rallies in the face of lower crude and nat gas are looking increasingly pathetic. For the group to meaningfully rally we need a capitulatory sell off. Without a good washout we can’t really go higher without heavy boughts of profit taking (the group’s been going up for years) every few hours.

  8. Attacking Mid said

    I lived in TX for 5 years, and I was in Los Angeles as recent as 9 months ago. Still never seen ’em. I think they’re a hoax ;^ )

    I haven’t seen any reports on BQI’s presentation at the Oil Sands Conference yet, but as I expected, some of the subscription newsletters came out with very positive articles. Frankly, I’m amazed at the market’s ho-hum reaction to such significantly positive news. It will go up in time.

    AM.

  9. Jon said

    Zman, great post. I really enjoy playing you at family gatherings 🙂

    The charts for USO+XNG reminded me of the guy on “Fast Money” (Bolling?) last summer. At the time, he pointed out that NatGas was lagging behind Crude going up and the market had to correct. Now it is looking the same, gas is lagging but this time to the down side.

    AM – Yes, there really are Tesoro stations in the west – but around here (northwest) they are hard to find. They aren’t located in prime locations and there’s very few of them, only 45 in all of Washington. http://tinyurl.com/2nfrb2

  10. Attacking Mid said

    Volatility (VIX) is getting very low. Some of my puts are losing ground despite the stocks being slightly down. So far, this isn’t my best week of trading 8^O

    AM.

  11. zmann said

    Painfully dull but at least we’re not in the pattern of what’s high drifts higher and what’s low drifts higher too.

    I’m amazed at how much direction the rest of the stocks take from XOM. Their volume is huge today (almost 22 mm with 2 hours to go). They report 2/1 and they’ve almost gotta warn before then. Again, virtually no change in estimates over the last 90 days so unless they do something completely different than the rest of the majors it’s gotta happen.

  12. ramana said

    My XLE puts went kaput !!! Well FEB exp is still far away. 🙂 Some consolation !!!

    — Ramana

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