zman’s Energy Brain

oil, gas, stocks, etc…

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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:

crude-inventories-011907.JPG

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.

days-supply-vs-oil-price.JPG

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.

gas-storage-011907.JPG

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.

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25 Responses to “Friday Super Mega Oil Post – Set Aside A Little Quiet Time For This One!”

  1. zmann said

    SLB beat estimates but the spike is already fading. They’re not giving their forecast for ’07 until Feb.

    PBW getting hit hard again. Everyone is waking up to the realization that the so called Clean Energy Bill of 2007 doesn’t actually fund, well, clean energy. It only pays for the legislative costs of future bills that will promote and fund it.

    MUR flat after initial morning jumps. Nymex open in 5 minutes means morning up oil could quickly fade.

  2. zmann said

    SLB says on conf call that US land drilling continues to be strong and that although that could change by spring they haven’t seen any weakness yet. Comment – then they’re not looking in the right places because its definitely out there!

  3. zmann said

    FBR ups TSO price target to $83 from $74. This is really starting to shape up to be a putter to watch. The premiums are stiff but they stay that way until you get very close to expiry.

  4. WDKING said

    Heh Z,

    almost about time to buy some XOM calls?…or are we at the “just when you want to throw in the towel stage?” been watching this thing since oil fell from high 70’s, I think if oil can rebound a bit or stay flat that XOM has a shot @ its highs again. This thing seems to laugh in the face of tumbling oil prices. Like I have been telling my friends, I think we are in the “euphoric stage”.

  5. zmann said

    WDKING – I’m thinking about it but only up to earnings on 2/1. I think they disappoint pretty bad unless the chemicals division saves them which I doubt. However, in this market, no one may care if they disappoint if oil gets a $2-3 bounce off $50 before , I think, going lower. I would set stops though as todays reflex rally may run out of steam on you pretty quickly if oil tires again later in the day.

  6. neil said

    Z – The FBR news was 2 days ago…..spoke to a very good refining analyst this morning, he likes TSO into earnings and thinks if you will have better opportunities to short it..He recommends shortng HOC if you want a refiner and then swapping into TSO if gasoline stocks keep building on the West Coast

  7. zmann said

    Thanks Neil! I hadn’t yet pulled the trigger on TSO. I’ve played the HOC in the past and it defies gravity, logic, etc. Way over priced but more thinly traded. Maybe it’s time again on that one!

  8. help said

    hw is everyone’s puts doing?

  9. zmann said

    XOI about to nudge up against 200 dma. Stocks are acting like Oil is $60….puts not so good today.

  10. Attacking Mid said

    EOG is on a tear. I sold half my puts yesterday, but I didn’t offset that one with calls. So, I just doubled-down. Hopefully, not a mistake.

    Glad I sold half of most of my put positions yesterday and took calls into today. I didn’t completely offset the damage, but it sure helped a lot. It’s looking like I may have sold the calls too soon. I could really stand a reversal of this rally!

    AM.

  11. zmann said

    Good morning AM. Nice moves. Me too on that reversal. XOI just can’t seem to get above/stay above 1,130 but they keep trying. I think they’re having fun frying the shorts today.

  12. zmann said

    Dumped my PBW Jans for $0.20 for a wash. I was too agressive on that one starting too far out of the money. Still think the alt energy group sees lower lows after a bounce. The “clean energy bill of 2007” will have trouble getting through the senate and actually doesn’t fund clean energy companies.

  13. zmann said

    Interesting read from Citigroup on oil. Lots of stats that boils down to $30 worth of move in oil attributable not to supply and demand but due to fund buying. Sounds pretty familiar

    http://www.billcara.com/Citi%20Jan%2016%202007.pdf

    Thanks to soccer on Phil’s site for the link!

  14. Attacking Mid said

    z – I don’t know how much influence can be exerted, but with options expiring today and the oil contracts expiring Monday, I’m sure there’s significant benefit to influential parties in having this spike in prices today (assuming most contracts are in a net short or put position). Thoughts?

    AM.

  15. zmann said

    I dunno. There’s certainly the opportunity for some quick profits by hammering the recently increased short position. The move in oil just seems to build on itself.

  16. zmann said

    At 1134.50 XOI now above 200 dma. Ludicrous but if it close above we could get a big bounce next week. I’ll exit puts today and reenter later next week if the stocks don’t pull back after the close of nymex.

  17. zmann said

    Today’s price action in oil and natural gas is a good example of why I don’t try to predict the very near term direction of prices. Nothing has fundamentally changed since yesterday when oil was plummeting except for NOAA’s prediction of more cold weather. Yet oil and especially gas are off to the races.

  18. zmann said

    OK guys, time for the periodically asked question “be honest, what do you like, dislike, and/or suggest this site needs”.

    …and if you so better picks that make me more money I will always agree with you but seriously, I’d like some suggestions.

    BTW, the stocks look toppy but volatility is falling rapidly. XOI back below the 200 dma.

  19. zmann said

    EEE making another run on $10…up 17% today on no news. Probably a leak of news to come next week. This happened last month on the 19th and the company had news by the 27th which it turned out was fairly myopic and the stock promptly sold back off.

  20. WDKING said

    Heh Z,

    I think maybe a monday morning plays of the week would be interesting, maybe stocks in the sector that look toppy or ready to bounce and how you would play them…….

  21. zmann said

    Can do. I like that idea better than a Friday wrap. Anything else.

  22. Attacking Mid said

    Wow, that was painful. My calls didn’t have enough delta to cover my puts. I bought some more puts as the day wore on, but at higher strikes. I expected a rise today, but not nearly this strong.

    What was up with EOG? That one killed me today. I doubled down midday, but the thing kept going up.

    Time to go watch my kid play soccer – hopefully that will allow the day to end on a winning note!

    Have a great weekend and stay warm down there in TX. While the rest of the country has been enjoying a mild winter, we’ve endured the worst winter I’ve ever seen in CO. We’ve been trekking and driving through snow for over a month. Sounds like some of the rest of you are getting it this week. Never fear, spring is not far off.

    AM.

  23. walter said

    WDKIND’s ideas are very good!

    “monday morning plays of the week”,
    “stocks in the sector that look toppy or ready to bounce”,

  24. walter said

    Z, I came across article saying that the street has discounted the oil sectors “recent woes” based on $46/bbl oil prices. The “consensus opinion” is that many of the major integrated oils are 15-20% undervalued based on $46/bbl oil.

    Can you comment on that?

  25. […] oil inventory data, which showed much higher than expected crude and gasoline inventory builds (click here for details on last week’s inventory numbers) . That data didn’t come out until 18th when traders had already made their bet simply on the […]

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