Friday Morning – Volatile Week & No Help For The Fundamentals

Natural Gas Inventory Report: 179 Bcf withdrawal vs my 165 Bcf. But like I said yesterday, you needed a REALLY BIG NUMBER to support gas at $7.50. Apparently that wasn’t it. Gas fell $0.52 to $6.90. Don’t forget the February contract falls off the board next Monday which, combined with the recent jump from $6 to $7.50, may exacerbate the decline. To get away from the effects of contract expiry I’m now watching the March contract, now at $6.91, and I’d have to say that we are in for a test of $6.19, the lowest level March 2007 contracts have ever traded at, by next Friday.

Where we stand on storage:

• Storage as of January 19, 2007: 2,757 Bcf

• Max storage for this week in history: 2,494 Bcf (2006)

• We remain 10% above year ago storage levels and a whopping 21% (472 Bcf!!!) above the 5 year average. One minorly bullish point (very minor) is that the trajectory of the surplus to last year is declining on the recent cold weather spell and this could continue through mid February.

• The average withdrawal for January is 563 Bcf with a range of 436 to 810 Bcf. I think the recent cold snap could make up for the smallish withdrawals at the beginning of the month and approach or slightly exceed the 563 number.

• 10 Weeks of Winter Remain (Roughly) And The Coldest Ever Such Period Saw Withdrawals of 1,280 Bcf. A repeat of that would still leave 1,477 Bcf in storage at the end of March.

• That’s well above the 5 yr average trough level storage (end of March) of 1,025 Bcf (excluding 2006’s warm and Katrina impacted levels). However, yesterday’s withdrawal was by no means the largest in history for that particular weak so if we’re going to see that coldest of all winter withdrawals in the remain time frame it’s going to have to get colder and stay cold through March.

To illustrate that last rather long winded paragraph more clearly please peruse this historical depiction of gas withdrawals in the final 10 weeks of winter.

…and then please examine this history of annual trough storage levels. Note the high / low for 2007 is well above the mean trough level.

The blue bar above represents the worst case for gas storage levels before the injection season begins (if history has anything to say about it that is)

Oil Fell Below $55 As The Phrase, “Wait a minute, 2027 Is 20 YEARS Away!” Echoed About The NYMEX Crude Pit. The “Bodman Show” Rally on Tuesday was just silly and the follow through that turned a blind eye on Wednesday to another set of blatantly bearish numbers finally ran out of steam today. Conviction really failed when March crude crossed $55 and selling continued through the Nymex close with the contract ending down $1.14 to $54.23.

Oil’s Cooked. The trend is not your friend. Here we have a 2 year chart the USO ETF, a proxy for WTI. Although USO has been trading since April of 2006 volume has recently accelerated on oil’s decline and the ETF’s recent secondary. I’m not a technician but that’s an ugly supported by pretty bad fundamentals.

And This Is The Index Of 15 Big Oil Companies Whose Top and Bottom Lines Depend on the Price of the Above.

The two look pretty similar through October 2005 but then oil flattened out and began falling while oil stocks, supported by seemingly low trailing valuations and a skyrocket the size of California’s GDP with which to fund buybacks, continued to move higher. At some point either oil has to go up or the stocks must come down. On a forward basis they are no longer cheap. Again, I’m a fundie guy but even I can see a chart that’s running out of steam and that to me is exactly what the XOI looks like now. I can also tell you that only chart more parabolic than the XOI chart above is one of service and drilling costs which has shot the moon. So if what you sell is sucking wind and the cost of getting it out of the ground is has been rising exponential what does that say about the out year’s earnings?

Holdings Watch: No new bets today. Just watching the old ones and considering taking a little off the table prior to the close today. “The Week Ahead” picks from Monday did pretty well especially if you paired back longs on Wednesday when I bailed on the longs in favor of common sense but I’ll have a Summer this week.

Analyst Watch: MUR upped to outperform at Bear Stearns (that’s two upgrades in a week – I guess everyone figures that the most of the expensive of the “mini-majors” has all the bad news out of the way), BJS cut to neutral at Credit Suisse.

Thursday – Oil & Gas Thoughts + Lots of Cool Charts

First, The Oil Reaction. Apparently everyone is convinced that George is preparing to blitz Iran. That’s the only thing I can come up with to explain the dip and subsequent rally to $55.37 after we got another build in distillates. Somehow the following inventory data was seen as bullish. Traders may see the lower than expected crude build as a sign Opec is finally easing off the production pedal but that’s pretty thin. More likely this is just a follow on of the retracement from the greatly oversold position we were in a few days ago. Here’s the high points of the inventory data:

• Oil: Up 0.75 Million Barrels. So imports fell 1.2 mm bopd from the prior week. I’d point out that a look at the 4 week average crude imports figures shows Opec is not yet serious about the cuts. 1/05/07: 9.416 mm bodpd, 1/12: 9.954, 1/19: 10.124. Thats a 7.5% INCREASE in oil imports in 3 weeks.

• Gasoline: Up 4 Million Barrels. It was icy, nobody likes to drive on ice. Actually demand is off only ever so slightly but the refiners are really starting to trim production.

• Distillates: Up 0.7 Million Barrels. Analysts were looking for a draw of between 250,000 and 1 million barrels. The average change in storage for the third week of the year back to 1999 is a withdrawal of 2.5 million barrels. We got a build and the weather was colder than normal. Hmmm.

Crude Inventories Remain Comfortably Above Average. That dip occurred when refineries cranked up activities late in the fourth quarter. I grudgingly give some credit for it to Opec although compliance with the first two rounds of cuts is still less than 65%. The slight uptick is a combination of a one week surge in imports and the refiners calling in sick.

Product Inventories Continue To Reverse Course And Rise. Not unseasonably strange for gasoline but heating oil is just unloved here.

• Gasoline inventories have jumped 20 million barrels in the last five weeks even as refinery utilization levels plummetted from 91 to 87.4%. Moreover, the days of supply chart confirms that the inventory rise is attributable to slack demand and not just a flood of imports. In fact, gasoline imports fell 12% week over week and were below year ago levels.

• Note To TSO: You’re Starting To Look Overheated. TSO has been the refinery analyst’s dream for one reason: PADD V (West Coast) cracks have been running roughly 3x those of the Gulf Coast. Everything else those guys cover has seen margins fall between 30 and 40% on a sequential basis but the West Coast margins were actually up 20% 3Q to 4Q and a whopping 50% YoY as high demand kept tougher to produce (I know, not as tough in the Winter as in the Summer) California gasoline inventories in check. However, since the third week in December, PADD V stocks have begun to build (their refineries aren’t the ones with the blue flu) and the Los Angeles benchmark price has started to catch up to the declines in other parts of the country seen earlier in the month.

• Distillate Inventories: Even I thought we’d get a small draw on stockpiles but the high secondary and tertiary inventory thesis yielded another build in inventories despite the coldest weather of the winter to date. Looking at the pattern below you can see how seasonally odd the weekly trend is. Note that this is all distillates (including diesel and not just heating oil) so at least it’s not bad news for the trucking stocks.

Natural Gas Inventory Day: Good Sized Withdrawal Simply Won’t Matter

• My Estimate: 165 Bcf withdrawal based on 230 heating degree days… On the surface the higher degree day reading would seem to imply a higher number than mine as seen here…

…And while its possible that we get a big kahuna pull the degree days were in the wrong areas to score a bigger draw. I could always be wrong on this and the reaction to even a small number may be as perplexing as yesterday’s action on oil but with gas up 20% in five days, its not that big a leap to make that gas needs a huge withdrawal to stay above $7 for any length of time.

Consensus Range: 150 to 190 Bcf Withdrawal. That’s probably Fimat on the low end those baggers!

The number to beat is probably 168 Bcf. That was the largest withdrawal of this season which was recorded in early December. Anything less and we should get a sell off and I think, as I said above, we’re coming in light of that number. I could always be wrong on this and the reaction to even a small number may be as perplexing as today’s action on oil but with gas up 20% in five days, its a not that big a risk to take.

January Is Shaping Up To Be About Average.

Estimates are in red

I’m even sporting a number for next week’s withdrawal! Next week shoudl see more demand despite an early aggregate degree day reading that is a bit warmer than the one last week. The HDDs simply appear to be moving into more gas centric regions:

click me to expand.

Even if this week and next week yield 170ish Bcf sized withdrawals you’re left with record storage for this time of the year of 2,596 Bcf. The previous record was set just last year at 2,494 Bcf. Moreover, 2.6 Tcf is well above the five year average of 2,180 Bcf.

After this week you’ve got about 10 weeks of winter left. The low to high range of withdrawals for this 10 week period (1994 to 2006) is 714 to 1,280 Bcf. If I assume that I’m right about the 165 Bcf today that yields trough storage (end of March) of 1,491 Bcf based on the max withdrawal case up to 2,057 Bcf on the weak withdrawal scenario. A verage trough over the last 12 years is 1,025 Bcf. While the hope of another withdrawal close to 200 Bcf may support prices through next week I continue to see gas testing $6 in early February and $5 later in the month.

Holdings Watch: If we get a gas withdrawal below 160 I’ll be taking more $65 puts on EOG and re-entering put positions in SWN, KWK, and/or ACI/BTU. This could be a very fast play as traders may shrug it off in hopes of a bigger number next week. However, with 20% profits in a week I’d bet they’re getting anxious.

Analyst Watch: RRC and KWK picked up a Wachovia as outperforms. Interesting to pick them up right before year end results are released. Cannacord also added DBLE at Buy.

Irony Watch: Nigeria is sending troops to Somalia. Ethiopia is beginning to withdraw after beating back the Somalia Islasmic Courts Council (SICC), the once leading opposition group to the transitional government of Somalia. Nigeria says it is training 770-1,000 troops and will deploy them as part of a peacekeeping force in about two weeks. Comment: if these guys have been just sitting around how come the government didn’t deploy them to the Niger Delta? Even worse, is that where they’re coming from? If so then: 1) the’re not very good at guarding things and 2) MEND will have a big party and “invite” a lot of foreign “guests”.

Earnings Watch:

• OXY just turned out a meet on the top line and a beat on the bottom. I’m not familiar with exectations for these guys going forward (other than what I see for estimates) but for a mini-major they seem to be eaking some orgainic production growth while maintainig profitablility in their Chemical division. In other words, nothing leaps off the page as a waring flag unlike at COP and those guys rallied on their “results” yesterday. People who think MUR and MRO are takeouts should really give OXY a look from that perspective.
• SU‘s 4Q performance and plans for 2007 look pretty much as expected so it’ll probably just continue to trade tightly with oil. The fragility of the oil sands, both physically and economically becomes readily apparent when you note how often their’s an insurance payout clouding results after a fire and how often $/boe operating costs can jump 20% in a quarter on higher labor or gas costs . Directionally, these guys are very much moving the right way and they’re even diversifying into ethanol (trendy, trendy) and wind farms.
• CNX provided a beat because they are relatively under-exposed to spot market prices and they’re predominantly a high BTU eastern coal player where demand has held up better. They did make some cautionary statements about the weather having yielded high coal inventories at utilities. More later….