zman’s Energy Brain

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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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48 Responses to “Thrill A Minute Thursday – Two Inventory Reports!”

  1. ramana said

    zman….another great inventory morning analysis.

    Thanks.

    — Ramana

  2. size123 said

    Thanks Zman. I don’t understand everything you post, but I am learning.

  3. zmann said

    Glad you like it!

    Sometimes I gloss over things without fully explaining. Please ask ’em if you got ’em.

  4. Henry said

    Z,

    great stuff as always….fyi, accuweather is predicting that the eastern 2/3 of the U.S. will have below normal temps and above normal precip…if proven accurate, snow on the ground enhances the cold and therefore the need for more energy

  5. Henry said

    oops…should have said above forecast from accuweather is for february

  6. zmann said

    Brrrr…Thanks Henry and Welcome! I doubted Bastardi and company early on but the cold seems to be hanging on. If February turns out to be colder than normal it’ll support gas at $5 in the March / Spring timeframe. Then everyone shifts thinking to how hot the summer is going to be.

  7. zmann said

    Gas Storage: 89 Bcf vs my 80-95 range. 😉 Maybe seen as a little bit high by the spinners and you should definitely look for 170+ next week.

    Oil: 6.8 mm bls build!!!!!!!!!!!!!!!!!!!!!!!!!!!!
    Dist up only 900K
    Gasoline up 3.5 mm bls!!!!!!!!!!

    Vindication is a dish best served with a glass of cheap crude!

  8. Ok there was that swing build in crude 6.8Mb. That was kinda a delay from the port closing.

    -SaneO

  9. Wow talk about a drop in refining util 87.9?

    -SaneO

  10. zmann said

    Sane – Good catch. It’s there little informal cartel way of propping up products and it’ll show up in next week!

  11. zmann said

    Wall Street complacency to falling prices has been unreal. Stocks just don’t want to give up.

    I’m betting we get the $50 test today. We’ve already touched $50.19 with oil off $2 yet the XOI isn’t yet off a percent. I think it falls later to day and am not taking profits at this time in any of today’s mentioned positions.

    EOG, MUR, and OII looking particularly vulnerable now. APC being held up on another asset sale.

  12. zmann said

    Bouncing from a low of $50.05 – stocks still acting like that level is made of concrete.

    I’ll bet that if we were to touch $49.99 or even $50.00 that a cascade of sell orders would hit.

  13. Attacking Mid said

    DVN even went briefly positive a few minutes ago. The longer this nonsense goes on, the higher the cliff becomes. I, too, am holding onto my heavy put position.

    AM.

  14. zmann said

    Going to do a bit on HES tomorrow but if anyone can tell why they have been completely immune to this downdraft my ears are open. Thanks.

    Uh oh. There goes oil trying for $50 again.

  15. zmann said

    XOM run up is obviously company buying itself. It moves to so fast you can tell they’re just taking the offer. The XOM moves actually precede those of USO and then the group takes off.

    OPEC hamstrung itself by having its most important member say that the market was very healthy just two days ago. They can’t just reverse and rescue this market. If we crack $50 the stocks will get clocked. Until then analysts and money managers are sitting on their hands.

  16. help said

    test

  17. help said

    CNBC says chavez calls for emergency meeting 😛

  18. Yeah like chavez is going to cut. I think the Sauds are getting a little tired of the likes of chavez, ajemenadd ( whatever ), and edmound who piss and moan about cuts, but don’t actually comply. Chavez and gang want the sauds to cut. The sauds are the only ones putting money back into their infrastructure to ramp up production, where the others are just greasing off the profits.

    Chavez needs to shut up.

    -SaneO

  19. help said

    Hope oIL sells off now….

  20. zmann said

    Opec is hamstrung by Saudi’s statements. Chavez is a nutbag with less and less influence within the cartel. He’ll cut production involuntarily as he shuts himself off from the technical knowhow needed to upgrade that heavy oil.

    AM – BQI trading $5. Any more news coming on this one?

    News flash: Wall Street sticks head in sand…and finds massive pool of oil!

  21. neil said

    XOM/CVX – why is NOBODY talking about the royalty give-back that will be voted on this afternoon..This could cost the majors billions of dollars on top of the recent plunge in oil prices…hy would anybody be buyng these stocks..the Former Senate Chairman on Energy was just on CNBC specifically target Chevron to give back $$$$$

    HES – has had decent luck recently with their exploration program – specifically the Pony Fields…With that said, they will get hit by East Coast refining margins

  22. help said

    xle 55 puts – 130k open interest
    xle 55 calls – 35k open interest

    which would you buy ? & why?

    Looks like oil will move up tomorrow to suck out the premium for this & next month

  23. help said

    hmmm..oil no thrill a minute today – seems 2 hve got stuck

  24. zmann said

    Welcome Neil

    The defense of the sector is incredible. They gave up on the MMS recovery…maybe people are assuming the same here as well.

    HES – I dunno. Usually support from exploration success is more fleeting. They really aren’t off much at all. Not as expensive as some but still their numbers are falling. Have you heard any takeout rumors on this one lately. The disparity is just too strange to be just good drillbit results.

    —————————-

    Would touch calls except on very short term play from the expected oil $50 dead cat bounce. The fundamentals stink and I’m a FA guy.

    I’d DTC in with a quarter to a third of your ultimate position around here and then pick an up day on the group for the rest (no Jan’s please!)

    On oil I’d expect a selloff into contract expiry next week as Opec is unlikely to do anything this week or next. But I really don’t make calls on one day or another because anything can happen between now and then and there’s often a lot of meaningless noise in the trades over the very short term. Long term we get a good test of $50 and then stop and probably bottom in the $45. It’s going to be very bouncy for a time.

  25. tom said

    Great news flash!!

  26. Attacking Mid said

    Next official news release for BQI not until mid February. No worries on the stock price. It could drop into the mid 4’s in sympathy for the rest of the oil stocks. However, moves of 50 cents up or down are not the story of this stock. I will continue to trade the options or the stock, but will maintain a “long” position 95% of the time for 2007.

    I think it’s obvious I have a lot of confidence in the prospects for this stock. Alas, it’s getting increasing interest and comments – here’s an example…. http://biz.yahoo.com/seekingalpha/070118/24527_id.html?.v=1

    AM.

  27. zmann said

    AM – you’re not the anon author on Seeking Alpha are you? LOL. Sounds strong but getting dragged with group. The rest of the single digit midget energy crowd is getting beaten with a stick while the large caps seem to be immune. Go figure, the growth is where you are but no one cares until oil bottoms.

  28. help said

    OIL below 50

    now for the selloff???

  29. Phil (Not that one) said

    Anyone know where to find the results of the House vote on energy as it happens?

  30. zmann said

    This gives you a play by play of the legislator’s day on HR66 – “reduce dependence on foreign oil blah, blah, blah”

    http://clerk.house.gov/floorsummary/floor.html?day=20070118&today=20070118

    They usually show these live on CSPAN1 or 2.

  31. Phil (Not that one) said

    Thanks Z,
    I’ve actually got that page open but wasn’t sure how quick they are to update it. Thanks for the quick reply 🙂

  32. zmann said

    Service stocks starting to take more of a dive w/o oil closed. My BHI and OII are doing what I’d hope my MUR, EOG etc would be on this move.

    XOI actually starting to give ground post nymex close as well. Reality check or wishful thinking on my part?

    Probably nothing from the analyst community except the odd upgrade tomorrow. I’ve noticed that either a major, large cap E&P or service name has been raised to buy on option expiration day for the past several months. Man the Street hates shorts.

  33. help said

    yup, I was wondering y stocks were moving slowly lower when oil is steady

    tomorrow I am thinking there might be a artifical pump

  34. Attacking Mid said

    I am going to lighten up on my puts and offset with some calls. Fridays recently have just not been good days to start off short.

    No, z, I didn’t write that article.

    AM.

  35. neil said

    Any thoughts on which way we go on the February contract and how it affects crude..With all the shorts (I assume they are rolled into March or later) can we still get a squeeze to the upside?

  36. zmann said

    Help – that’s it…no hope of a better recovery today, you could be right about tomorrow but I think we at least get a $50 test in the morning barring rebels, BP, other disruptions.

    ——————————————————-

    AM had to ask. Here ya Friday’s not so good for puts

    ——————————————————

    My little PBW is getting slapped. Finally ITM on my puts at expiry. Thought I was hosed but if oil is this cheap the alt energy plays will continue to hurt.

  37. zmann said

    N – hard to say but their’s still more long than shorts. Feb’s about cooked and I’m switching to watch March and later dated contracts. The 12 month strip doesn’t look as bad (today) as the front month so I’d say theirs a rush to get out that’s not done yet. But I could obviously be on the wrong side of that. I really don’t do day to day or hour to hour predicting that well because I’ve never tried. I just try to have a strong grasp of the fundies and get the direction right of the near to medium term. Sorry if that doesn’t help too much.

  38. help said

    Just wondering – what makes you think it will touch/go below 50 tomorrow?

  39. zmann said

    H – gut. Psychologically it needs to hit $50 again. Today’s test was what, a couple of minutes below the mark? Not worth betting on and very short term price movements is really not what I spend any real amount of time on.

  40. zmann said

    Lars, Jon and several other new people. I apologoize for not replying to your posts over the last several days. My spam blocker knocked you guys out. If you ever don’t see a post over here you can alert my over at Phil’s on either the member or non-member portions of the site.

  41. zmann said

    From AP a few minutes ago…

    Saudi oil minister Ali Naimi, who earlier this week said he opposed calls from other OPEC members for new cuts in production, announced Thursday his country planned to increase its crude oil production capacity nearly 40 percent by 2009 and double its refining size over the next five years to keep pace with growing global demand.

    Don’t you know Chavez and Adnineedhajad are screaming at their oil ministers right now!

  42. Attacking Mid said

    I’m fairly neutral going into tomorrow with about an equal number of puts and calls. If the stocks would have gone down significantly today, I would have loved to cash in all my puts, flip to a few calls, then flip back to puts on Friday. I had to cash in some slightly underwater positions to reposition, but I’m just very leary of holding puts going into a Friday.

    I also picked up some shares of BQI before the close along with adding to my put position.

    I should just stay away from non-energy plays, as the market completely fooled me with my AAPL play. If I went short, the stock went up, if I went long, it went down. I quadrupled down on my calls today (it really didn’t take much cash…. they went down THAT much).

    Don’t get too excited, Mr. Market,…. I’m not through with you just yet! As the Governator would say,…. I’ll be back!

    See y’all tomorrow.

    Thanks for the site, z. I enjoy reading your comments.

    AM.

  43. zmann said

    Tanks AM, I enjoy making them. I’m out for a few hours as well…

  44. walter said

    Zmann, what are your thoughts on VLO right now?

    Thanks

  45. Lars said

    No problem on the replies – I figured it was an overactive spam blocker. I really enjoy your site and appreciate your work.

  46. Lars said

    test

  47. Lars said

    OK, finally got the spam blocker figured out. It didn’t like my other email address – interesting. Anyway, I enjoy your site and appreciate your hard work here.

  48. zmann said

    Welcome to the site Lars! – Sorry about the lame reception. I checked the spam blocker today and you and few others were stuck in the queue. I will try to check it more often in the future.

    ——————————————

    Walter…I’ll get back to you on VLO later in the evening but the answer is almost certainly going to be negative on them and most of the refiners. With oil off less than products YTD and products inventories having quickly reversed from below average levels to above average levels I’d be hard pressed to call a bottom here. But I’ll run some other traps and get back to you a little later. Thanks for reading!

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