Tuesday – Oil Continues To Yo-Yo

Oil Just Couldn’t Manage To Gain For Two Days In A Row. After a promising opening (for the bulls at least) which saw February crude add another $1.45 onto yesterday’s buck fifty advance to reach an inter-day high of $53.44…the bulls exhaled. Crude fell like the value of the Dinar on payday I assume on scurrilous rumors that there’s a lot of the stuff stockpiled all over the globe right now. When the dust settled, the February contract settled down $0.86 at $51.13. Year to date oil has still not managed to put together two up days in a row. This morning crude is up slightly on more kidnappings in Nigeria but I wouldn’t expect that strength to last long.

We should get another “$50 test” this week. The March crude contract closed yesterday day down $0.82 to $52.58. To be fair if we reach $51.45 on the March contract that’s the same as hitting $50 on the February. However, the psychological impact of breaking $50 won’t actually be as powerful until we break, well, $50. Near term the new contract may also rally to $55 before reversing on further high import/low refiner utilization based builds shown in crude stockpiles tomorrow. Just because it’s cold I don’t expect a mega massive draw on heating oil supplies tomorrow. Maybe next week but not tomorrow.

Opec Watch:

• Sudan still plans to join Opec but announced yesterday that it will double it’s current production to 1 mm bopd over the next 2-3 years. Opec ministers are probably not too happy about that but the turmoil brought by adding Sudan to the cartel may well be worth it. Sudan makes Nigeria look like a day, albeit an involuntary one, at the beach. Since Sudan is relatively small as oil producers go I wonder what the thinking is on inviting them into the clubhouse? It couldn’t be that even if they cheat it won’t really make a dent but that the chances of them having a full scale civil war/becoming a terrorist state in the next 15 minutes is entirely within the realm of possibility which of course provides oil with additional “instability premium.” Nah, can’t be.

• Speaking of Nigeria, rebels there took an American and a Brit hostage overnight. The kidnappers demanded $11.7 million for their safe return and this explains this morning’s reversal of overnight losses in crude. For more details click here.

Natural Gas Rallied Late In The Session To Score A 17% Rise In The Last 3 Days! It’s like they woke up and noticed it was cold outside which tells me this rally will be fleeting. Weak resistance is at $7.50 with a much more solid ceiling at $8. Let me just point out that we still have record gas in storage for this time of year and that $8 is absolutely and completely delusional pricing right now. By the way, this sudden rise in gas costs is not good news for SU so if oil continues to drag its feet and gas manages to hold $7 I’ll be looking for that one to head back to test $70.

Retail Natural Gas Prices Are Starting To Fall Even For The Residential Customer. Always slower to decline than the commodity (a lot like gasoline at the pump vs the wholesale price) the reduced price of natural gas is finally starting to reach the consumer. The chart below, courtesy of the EIA, demonstrates that the last bastion of retail strength, the residential component, is now lower than year ago levels. Industrial demand, which accounts for roughly one-third to one-quarter of all consumption depending on the time of the year, is touching on two year lows. So far the natural gas storage withdrawals do not reflect a sudden priced induced “demand creation” response however it may be around the corner. This demand response coupled with reduced supplies from Canada and flat to down LNG shipments could set up a tighter supply/demand balance later this year. Nothing concrete just yet but I’m always looking for things that could prove my “gas is too damn high” thesis wrong. At some point, probably in mid to late 2007, I wouldn’t be surprised to see this tightening of the North American gas market occur.

Weather Bodes Big But Not Huge Gas Withdrawal On Thursday: CPC heating days for the past week came in at 230 versus the early read at 215. In aggregate last week was the coldest of this winter (like you needed me to tell you that). December 9th was the second coldest (215 HDD’s) and saw the largest draw on gas storage season to date at 168 Bcf. However, it was colder in the eastern and producing regions of the country during that week in December. I’ll be looking for something close to a tie with that week and not an outright beat. Tune in Thursday morning for more on the math behind what should be my low ball estimate to Street Consensus.

Holdings Watch: Sitting on my notes from yesterday as oil waffles and gas rises in a suckers rally. I haven’t pulled the trigger on any of yesterday’s “week ahead” musings as yesterday’s rally continuation looked like too much of a waning head-fake move to me. I did manage to pick off the EOG Feb 60 puts at $0.50 after several hours of low balling my offer.

Odds & Ends

HATS OFF TO MURPHY OIL FOR SENDING ALL GRADUATES OF THEIR HOME TOWN HIGH SCHOOL TO COLLEGE! MUR is still expensive relative to its peers and has had some recent foibles on the exploration side, and is suffering from pretty nasty comps as commodities continue to slide but at least they’re a class act and heads up players at a time when other oil companies (BP) are reeling from repeated swirlies in the bad PR toilet bowl. Even Pelosi and Co. will be hard pressed to dress down a company that uses it’s “undeserved windfall profits” so altruistically.

China National Petroleum Corp Sees 2007 Production Down 5%. CNPC accounted for 58% of Chinese oil output in 2006 producing a record 2.14 mm bopd. This year the company sees a 5% decline to 2.03 mm bopd (a 110,000 bopd reduction) due to a combination of a aging and over-stressed oil fields and lower prices for oil which 1) yield commensurately lower capital budgets for reinvestment and 2) force some new oil projects beyond the realm of economic viability.

• PTR may get shelled on the news. Keep in mind that CNPC rarely misses their targets since they set pretty conservative (low) hurdles at the beginning of the year (they’ve got the key to capitalism down pat: under-promise and over-deliver). However, this news will likely punch PTR, the publicly traded operator of CNPC’s assets, in the gut so forget what I said yesterday about a rebound until after the pain has subsided. If it doesn’t immediately (2-3 hours) shave 2-3 % off PTR‘s share prices I’ll be in long as a hedge on my other puts. A quick eye ball of the chart says to abandon this position if it, subsequent to my purchase, breaks $120 to the downside.

• Bulls may grasp briefly at the China card. If spun hard by T Boone and/or CNBC this could provide another fleeting wedge of reasoning in support of oil bottoming around the $50 mark. For that to work, the bulls have got to keep Saudi Arabia’s plans to massively increase surplus production capacity out of the headlines. Maybe they can get the Chinese to shoot down any satellites orbiting over Saudi Arabia so no one can get snaps of the city sized refineries they’re about to build.

Analyst Watch: FBR ups PEIX to buy (don’t those guys use high priced corn to make ethanol?), and Bear Sterns is cutting ratings on most drillers it covers: ESV UDRL, WFT, THE, PDE, DRC, GRP (I’ve been saying this for weeks but they just don’t listen!)