Friday Super Mega Oil Post – Set Aside A Little Quiet Time For This One!
Posted by zmann on January 19, 2007
Oil: $50 Test Achieved! For about five minutes we hit the mark even falling to $49.90 before a very late session bounce lifted the February contract to a more palatable $50.40. Talk about saved by the bell! I think we may get a brief bounce but that we’re ultimately headed to $48 if not $45. While oil closed off another 3% the energy stocks of course held the line with a muted and only slightly down day. It’s not like they sell this stuff…
The inventory data was about as bearish as you could ask for from weekly statistics:
- Crude up 6.8 mm bls! No one thought it would be that high. Not even the Fimat handicappers who topped estimates a 2 mm bls build. Like I said earlier this week, the four week average tanker loadings are expected to be up through the end of January. Kind of puts the kibosh on theories that Opec members are actually complying with their already announced cuts. Even the generally more conservative (and accurate) American Petroleum Institute recorded a massive build in crude stocks of 7.3mm bls. CNBC attributed this to a double time processing of the backlog of tankers entering the Houston Ship Channel but the drop in refinery utilization from 91.5% to 87.9% most certainly played a larger role. Imports also jumped by 1.5 mm bls over the prior week (cheaters, cheaters)
- Distillates at 900,000 bls – probably the last build for a few weeks but I wouldn’t expect a series of big draws correlated to the second cold snap of the season (the upcoming week is estimated to be about the same as the weather in the first week of December). Full storage tanks at distributors and homes should help to moderate demand at least for 2-3 weeks.
- Gasoline up 3.5 mm bls. What can I say? Implied demand remains fairly strong (up 1.2% vs the year ago week) due in part to the warm weather. The gasoline build reported next week would have almost certainly been bigger with the winter storms this week snarling traffic across a broad swath of the U.S. but the increased refinery downtime will probably offset.
The following charts pretty much say that we’ve got plenty of everything:
And Now For Something Completely Different (And New!) The preceding charts are your pretty typical snapshot of the data and they point to healthy inventories relative to demand for the last two years. However, in this week’s data release the EIA made available long term historical days of supply data but didn’t bother to graph it in their weekly. So I did. What it shows is that the US is well supplied relative to the long term history and when you overlay this data with crude you’ve got to ask, even after the recent price decline, why crude is even this high.
We have roughly the same supply demand dynamic that we had in the late 1990’s and yet prices are 5 times as high. Don’t get me wrong. I’m not saying we should go back to $12 crude. I watched the unemployed oil workers walk down Congress Avenue in Austin enmasse and it was a sad time. I’m just proposing that there is an argument for lower oil prices based on U.S. data which many of the “we’ve fallen too far and oil has got to rally ” crowd don’t know about or are ignoring. That’s only one pillar of my lower oil argument which includes rising Opec and Non-Opec Capacity and a reduction in the world’s oil demand growth rate.
One Last Oil Thing: Regional gasoline stocks have been rising fast everywhere but on the west coast. Now PADD V stocks are on the rise as well. TSO it was nice while it lasted!
Opec Watch: Even as prices were touching the $50 mark the Saudi oil minister was making very bearish comments:
- Plans to increase Saudi Arabia’s oil production capacity by 40% by 2009. That’s 1.7 mm bls which is slightly larger than all of expected non-opec supply of 1.4 mm bls for 2007 (Note: IEA just cut non-opec 2007 supply growth from 1.7 to 1.4 mm bls yesterday but I missed it and the market seemed to shrug it off).
- The minister said Saudi was looking beyond “short-term aberrations” in markets. This is a really big deal that you just can’t make too much out of. As I said earlier this past Tuesday:
- 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.
- You could hear the simultaneous screams of “Noooooooo!!!” from the Venezuelan and Iranian oil ministers all the way to the NYMEX floor.
- In Nigeria 6 workers were release unharmed yesterday. MEND continues to hold 2 Italians and 1 Lebanese.
- Iranian Newspapers Criticizing Ahmadinejad over drawing UN sanctions. Cracks are forming in this guy’s support base. Supreme leader Ayatollah Ali Khamenei runs the show and owns one of the newspapers which basically said the Ahmadinejad was harming the country and had no clear strategy.
- I’m becoming a little more concerned about the escalating tentions with Iran. With the positioning of a second US carrier group in the Persian Gulf and a report by the Arab Times that the US is planning a strike before April 2007 the possibility of an incident is increasingly likely. If tensions keep mounting it could act as support for oil.
Natural Gas: 89 Bcf Withdrawal Pretty Much In Line With Me And The Street. I was projecting 80 to 95 Bcf so no change to my thoughts that this January will running pretty much in line with the average one. While this week and last were well short of the five year averages (combined they were short around 100 Bcf) I expect the protracted cold spell we are presently suffering through will get us to about par for the month. Again, the chart below says it all but I have more detailed comments here.
Sentiment & Holdings Watch:
- Oil – Bearish but with downside in the next two weeks limited to 10% ($45). Please note that 10% is nothing to sneeze at and if we do break and hold below $50 that it’ll be a very red day on your screens for the energy group.
- Gas – Bearish but cautious. The smaller than normal draw was met with yawns as everyone is more concerned with oil and next week’s expected big winter draw. I’d not place big bets against gas just yet but in Feb I see $5s and if we warm up again through March we’ll probably bottom in the $4s.
- Stocks: Bearish with the understanding that we still are likely to get a near term bounce if oil fails to pierce $50 fairly quickly but then I’ll just add to puts. Otherwise, no stock specific comment change from yesterday’s post except to say that my puts against the alternative energy ETF PBW are now panning out nicely. Sometimes it’s better to be lucky than good but the timing couldn’t be better since I still hold some Januaries that I had thought were worthless.
- The stocks pretty shrugged this off as well. The House of Representatives easily passed H.R.6, the so called “reduced dependency on foreign oil” bill which would recoup billions in unpaid royalties from oil companies. The bill is also known as the Clean Energy Act of 2007 but the first two section deal with 1) ending subsidies for domestic oil and 2) ending royalty relief in the Gulf of Mexico for certain leases. Those 2 items do anything but reduce our dependency on foreign oil since they make it harder for companies to economically produce it. No matter, the title must come from the third section which deals with subsidizing clean energy projects through the establishment of a “strategic energy efficiency reserve.” This reserve comes from the monies generated by the first two items and is to be used “to offset the cost of subsequent legislation” to accelerate promote and invest in R&D. Not to pay for those things but to pay for the legal costs of getting them enacted. What a boondoggle.
Analyst Watch: Nothing, nada, zippo.