zman’s Energy Brain

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Friday Morning – Volatile Week & No Help For The Fundamentals

Posted by zmann on January 25, 2007

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.

35 Responses to “Friday Morning – Volatile Week & No Help For The Fundamentals”

  1. Attacking Mid said

    Great stuff, z! I really appreciate your sharing of your hard work and knowledge.

    I’m more of a simpleton. I’ve watched oil stocks go up on Fridays for several weeks, hence, I sold most of my puts today and bought a few SU calls (only cuz SU is my favorite trading stock as of late). If the recent pattern continues, I’ll pick up some puts (SU, EOG, VLO, take your pick) Friday afternoon.

    BQI – I sold some of my calls a few days ago, but I loaded back up big time today. This stock can bounce around, but I expect it to a LEAST hit $5.50 when the next drilling results PR is released in mid Feb. There seems to be increasing interest in the stock, as the volume has greatly increased as of late. This thing has the potential to be huge, but it’s hard to predict how soon the stock price will start rising significantly. The monthly drilling results should bring incremental rises in the stock’s trading range, but the company has stated that next fall is when they expect to be able to reveal the details regarding the size if their reserves. If things go well, I’d say next fall is when the real fireworks could happen. In the meantime, the $5 calls are a good way to participate…. just don’t reach for ’em. If you watch, they go “on sale” every once in a while (like today when I picked up some Aprils for $0.60 and some Febs for $0.25)

    I’d never traded EOG until following your lead. I had doubled-down twice on puts (which means I was over-committed), and got out today at about even (not bad, considering I started buying puts when the stock was in the low 60’s). That stock has been volatile lately – makes for a good trading vehicle. I’m going to keep watching and trading it.

    Keep up the good work!


  2. neil said

    you guys might want to buy HES puts into todays Bear upgrade…Analyst isnt too good and stock reports on Weds, I am not looking for very good #’s, since they have dry hole costs incurred and exposure to East Coast refining margins…Going forward, they will def trumpet their drilling success, but that still might be 2-3 years away…..

  3. walter said

    Good info on HES – thank you.

  4. zmann said

    Thanks Neil,

    Missed that Upgrade on HES. They were on Monday’s list to “watch like a hawk” for a chance to short. It’s completely unscathed. Not the most expensive name in the group but come on.

    What did the Bear guy site as reasoning for the upgrade. He upped MUR this moring which at 14x + on fwd earings may serve as confirmation of your “not to good” comment. Everyone thinks its a huge takeout candidate and that may be but that’s not a good reason for an analyst to ignore the recent events and valuation.

  5. zmann said

    Seeking Alpha published yesterday’s piece just now. They also cut my title but better late than never I guess. It was supposed to come out BEFORE the gas storage but again BLTN.

  6. neil said

    HES..upgrade SOLELY based on oil going up and HES and MUR being most leveraged

    IF HES is MOST levered and stock has been unscated in oil sell-off, then it reasons that it should have been DOWN the most when crude sold off

  7. Jeff said

    story in globe and mail today about BP being interested in buying SU, so your calls should get some nice action.

  8. Jeff said

    HES …

    gotta remember HES had like 70% of its production hedged in ’06 in the mid 30’s so they really didn’t benefit from prices last year. most of those hedge rolled off 1/1/07 although they are still holding some long dated N Sea hedges in the low 30s…have been an exploration underperformer for years, but they’ve rejiggered the portfolio and have a few high impact projects 2-3 years out (EG, JDA, etc.)

  9. zmann said

    Had to step out just before the open and I get back you guys let the group rally. Man!


    Neil – priceless
    AM – still watching BQI
    Jeff – welcome back. Nobody should let BP buy SU. I admit the fit but who want’s a company that’s behind the 8 ball operational running an oil sand upgrader? That’t be a fire a quarter instead of one every year. LOL

    Great point on the hedges. I’ll do some snooping this weekend


  10. zmann said

    Tanker tracker Oil Movements reported that it expects exports from the Organization of Petroleum Exporting Countries to rise in mid-February – fanning doubts that had been allayed a day earlier, when ConocoPhillips’ chief executive Jim Mulva said the company was firmly instructed to curb output from its Libya and Venezuela operations.

    Comment: COP said they were losing about 30,00 bopd between the two ops and their working interests aren’t that small in these large projects so people should have known the cuts remain bogus.

  11. zmann said

    Long dated SU calls, short date BP puts anyone. I hear the rumor made CNBC now.

  12. Attacking Mid said

    XOM and CVX seem to be putting a damper on the oil stock rally. What’s up with them?


  13. zmann said

    AM – I think they’re seeing that the oil pump was pre NYMEX open, which is usually kind of sketchy but today their’s just no reason for it.

    Congrats on the SU. I’ve got my finger on the trigger for BP puts.


    Neil … thanks again re HES and MUR. That’s going to get get some graphics in my weekend comments. The logic to his argument is less than compelling when you see the price target gains for MUR and HESS amount to the same percentage, which is just 2 points over the threshold for a buy rating at most firms. The multiples that get the PTs there are scattered. Priceless. Maybe they’re on the cover of upcoming debt deal.

  14. BP looking at buying SU…….. yuck……

    I guess BP is running out of shit to break.


  15. zmann said

    FBR actually cut pt on SU from $95 to $85 after yesterday’s results.

  16. zmann said

    USO trying to crack $45.70 and XOM is tracking tick for tick. Every other stock is looking to XOM for guidance after the opening positioning of late.

    Weaker dollar helping curde a bit today.

    Gas move up is just a reflex rally. Thinking about taking third position in EOG up here but Mondays have not been kind to puts of late and theres the time value thing yada, yada, yada.

    PTR had $4 up day yesterday and is off a bit. Maybe resuming the downtrend again . Talk about leverage to oil prices…

  17. zmann said

    HAL saying 2007 rig counts and pricing still rising.

    Expects no decline in 2007 margins/demand

    Sounds like the homebuilders 12 months ago.

    If that’s the case than why are some of the private rig providers filing bankrupcy in the Barnett?

    If that’s the case, it’s really bad news for the majors and E&P’s since it proves that their margins are going to shrink!

  18. zmann said

    TSO – is that a triple top I see? It just doesn’t get any better for these guys . Strongly considering a small opening position in the Feb 70 puts.

  19. zmann said

    Oil popping a bit on Bush’s Iran comments in the last hour

  20. neil said

    tso – unles they MISS the #, we should have time to sell on the news…also, options are prob juiced right now, so if anything, sell calls, your only risk will be a massive buy-back.personally, i will look to sell into strength AFTER earnings

  21. zmann said

    TSO – point taken. Was just thinking about taking a toehold in case world peace breaks out over the weekend.

    Interesting to see service flat to down post HAL.

    Oil seems stalled here. It’ll be interesting to see if it holds $55 into the NYMEX close.

  22. neil said

    was HAL that bad a #..was there anything on their call that was negative….stock is STILL the cheapest in the group

  23. zmann said

    Seeing premiums down on the reduced IV so March puts are starting to look like a lot better deal than 2 month out puts have been of late. When I refer to positions from this point out over the next few weeks I’ll be talking about March or beyond unless otherwise stated.

    I’ve got low offers out on SLB, BHI, and HES positions this afternoon but otherwise I’m done for the week. May take a little BP putter at the close on the offhand chance that where there’s smoke there’s fire on the SU deal.

  24. zmann said

    I don’t see a transcript yet but from what I saw it wasn’t a bad number at all. Very positive commentary on margins and demand now and for the year.

    Of course BS had this to say: “If U.S. gas producers begin to cut back on their drilling budgets, the service companies will feel the impact almost immediately,”

    Shockingly intuitive! Also a rather broad generalization which is not universally true.

    Partial fill on my BHI. Agreed that HAL is cheap but people are seriously scare of the power of Pelosi. It and KBR continue to drag the stock. Meanwhile I’ll stay away and buy puts on a really good but pricier name like SLB.

  25. zmann said

    Got a few SLB 60 Mar puts on this close of Nymex pump for $0.80

  26. zmann said

    Still tempted to take that shot at TSO…now up over a buck off its lows today but will wait for Neal to talk me out of it again.

  27. neil said

    on my news service, it has been commenting about how overall option volatility on the Energy space is coming in as oil seems to have stabalized…if we get oil in a tight range next week, more volatility will come out of the space….i HATE buying volatility ahead of the weekend

  28. nltd said

    With oil up $1+, most oil stocks not up that much, and a sprinkle of red on my VLO rule page. . .is reality finally starting to show???

    HAL–earnings announced–down %40 from last year– .64per share, est .61, so apparently beat by .03 on $6B (analyst est 5.9B) revenue


  29. nltd said

    TSO earnings noon Monday if my info correct. . .


  30. foo said

    Z – did you mean the FEB 60 Puts for .80?

    BTW, nice blog!

  31. zmann said

    Welcome Foo! Sorry, meant March $57.50s for $0.80.

  32. foo said

    Z – I see the SLB 57.50 Mar Puts for .80.

    Here’s the Friday closing pump again.

  33. zmann said

    I was just trying to see if anyone was paying attention this late in the day on a Friday. Foo wins.

    Stocks rallying with the Dow. Wow, just got an opening position on BP. Mar 60 puts for $0.60.

  34. zmann said

    US rigs down 46, all but one onshore
    20 oil /26 gas
    over half the count in Tx, La

    Still well ahead of last year but the gap is a little smaller than it has been for the last few months. Kind of funny to see it on a day when HAL sees no weakness in drilling.

  35. JJ said

    ZMan —

    I once had a bookmark in my favorites that included a 5-year historical chart for natural gas consumption. The chart is updated weekly. It was free and I did not have to register. I thought it was from the American Gas or Petroleum groups but you have to register with them. If I remember correctly the chart colors were maroon and gold.

    Anyway, in that I lost the site so maybe you know of this chart and point me in the right direction.


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