zman’s Energy Brain

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Archive for January 18th, 2007

Thrill A Minute Thursday – Two Inventory Reports!

Posted by zmann on January 18, 2007

We get both oil and natural gas inventory reports from the EIA today so in the immortal words of Samuel L. Jackson, “Hang on to your butts!”

The Deal With Oil Prices – Question: When was the last time oil strung together two whole consecutive days of gains? Answer: December 29. And it’s not simply two steps down and then one step back up. It’s sizable moves to the downside that leave people asking a second question: What is going on? Answer: speculators are reversing long held bullish positions. They have seen the writing on the wall and are moving towards the nether realm of the shorts.

I give you two charts built strictly from CFTC data that records the activities of non-commercial futures market participants (otherwise known as speculators). The first chart reflects the net position (longs less shorts) of speculators (otherwise known as hedge funds) participating in the buying and selling of Light Sweet Crude futures contracts on the NYMEX. This is generally what we think of oil. The second also reflects a net position held by speculators but this time the contracts are West Texas Intermediate ones (WTI) or the world’s oil price as I like to call it.

oil-cftc-011807.JPG

Please note the trend of both is not positive.

Notes on the above charts: 1) Shockingly the net position in light sweet crude contracts looks a lot like a chart of oil prices. Hmmmm… Can it be that hedge funds (ahem, speculators) have that much influence on oil prices? 2) I used all the data the CFTC had for WTI contracts so there’s nothing I can do about the short nature of the chart but the trend is the same. Importantly, the USO ETF is backed by WTI contracts. Maybe that’s why the CFTC saw fit to start tracking them a couple of months after the fund started buying so many to back its units.

$50. “Not If But When.” … many technical analysts said it is not a question of if but when the market will test the $50 support level. “Most of our charts suggest the prices will continue heading south, perhaps punctuated by the odd bounce,” Man Financial said. I’m no TA guy but they are.

International Energy Agency Cuts Oil Demand Forecast. IEA cut its oil product demand growth forecasts for 2006 and 2007, citing significant revisions in the United States, mild weather, adjustments to U.S. GDP assumptions and lower apparent demand in the former Soviet Union countries. The IEA is now forecasting demand growth of 0.9% for 2006 and 1.6% for 2007. That’s a downgrade of 120,000 barrels a day for 2006 and 160,000 barrels for 2007 -from Market Watch.

Oil Inventory Consensus:

  • Crude stocks UP 200,000 bls (which would be the first rise in eight weeks). The range is giant with Fimat expecting a build of 2 mm bls (there’s no stopping these guys!- anything less is obviously bullish!!! They are so obvious!) and Wachovia expecting a draw of 2 mm bls.
  • Distillate stocks UP 1.5 million bls, – actually sounds fair but bearish for the commodity. While, I think this may be the last of the big winter inventory builds for several weeks the secondary and tertiary inventories I’ve oftened referred to in the past should mitigate sharp withdrawals at this point.
  • Gasoline stocks UP 2.3 million bls, – Retail gasoline is off about only $0.06 (greedy retailers) while wholesale levels are down $0.30 so I don’t doubt that inventories will continue to build.

Opec Watch:

  • Saudi Quiet After “Market Very Healthy Comment.” All quiet on the Saudi front after Tuesday’s bombshell of a comment that that prior cuts are working and there is no need for further cuts since the market is very healthy right now. Pretty smart move. Disarm the sense of panic.
  • Nigeria Not So Quiet (as usual). MEND killed (not captured) a dutch oil worker and a Nigerian military serviceman this week. Meanwhile, three AGIP employees appear to be on the cusp of release and the government said Tuesday that it is deploying more troops to the Niger delta where it’s becoming as dangerous to ride in an oil service supply boat as it is to driver a Hummer in Bagdad. Nigeria’s oil minister advocated a wait and see approach as to the effectiveness of the upcoming February cuts echoing the Saudi minister that no emergency meeting is needed.

Natural Gas Fell $0.40 To $6.23 Wednesday but got little attention as oil rallied a buck. If $5o is the big test for oil then $6 is becoming the test for gas.

  • Consensus: I’ve seen two estimates at 80 and 88 Bcf but I ahve nots seen a consensus as of this morning.
  • My Estimate: 80-95 Bcf. You had the second coldest week of the year in both the east and west consuming regions and the third coldest week in the producing region.
  • And still it doesn’t stack up to historical norms: The 5 year average for the second week of the year is a 117 Bcf draw with a with a withdrawal range of 46 to 153 Bcf.
  • That’s still pathetic and not anywhere near to getting us back on track to forestall high inventories in April and commensurately low gas prices $4-$5.
  • Warning: Next week will be bigger and traders may choose to ignore this week’s number as the east remains in the deep freeze. Next week you’re looking at a tie for the coldest week of the winter to date and as such we should be a respectable pull of between 170 and 200 Bcf.
  • Excluding 2006, the five year average January gas withdrawal from storage is 563 Bcf. We’ll know more after today but at present this month appears to be shaping up to meet average withdrawals for January. I personally think it will fall short but if we assume that the last half of January stays this cold then storage hits average levels.

jan-math-1.JPG

Anyway, more about storage in tomorrow’s post.

Holding Watch: Still like puts in the gassy stock realm on APC, EOG, UPL, and BTU (it’s coal but believe me it trades with gas or this chart wouldn’t look so familiar) although a rising tide (oil) will life all boats if indeed the tide comes in. Still holding perennial putter MUR – (too expensive, out estimates still falling), as well as EEE, PBW, (a couple of bets against expensive techy energy), and am looking hard at the re-entering positions in the drillers (see yesterday’s post).

Analyst Watch: No activity.

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