zman’s Energy Brain

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Thursday – Oil & Gas Thoughts + Lots of Cool Charts

Posted by zmann on January 25, 2007

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.

crude-inventory-012407.JPG

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.

gasoline-new-012407.JPG

  • 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.

heating-oil-012407.JPG

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…

gas-vs-hdd-012407.JPG

…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.

gas-table-012407.JPG

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:

weekly-gas-prediction-012407.JPGclick 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….
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28 Responses to “Thursday – Oil & Gas Thoughts + Lots of Cool Charts”

  1. zmann said

    BTU is guiding $0.25 to $0.40 for Q1. Estimates are for $0.70. Heheheheh!

  2. nltd said

    Z

    Is there an index that tracks coal? Is there often a big disparity between eastern and western based coal stocks (or are most of these companies diversified east/west to the point it doesn’t matter)?

    thanks,
    N

  3. zmann said

    Don’t know of an index but I’ll look. The industry is highly fragmented with lots and lots of private companies but the big boys are generally spread out. I’ll put together a table of exposure. Also, some have more term contracts, like a CNX than others, apparently like a BTU.

  4. neil said

    bjs missed big time..could be ST negative for HAL WFT SWSI, the latter who is aggressively pricing

  5. zmann said

    Thanks Neil. SLB’s had a big run post earnings but even they warned that things could slow soon.

  6. zmann said

    EOG could crack pretty hard here if gas gives up the ghost. Chart looks like a telephone pole but just cracked the 200 and 50 dmas to the downside.

  7. zmann said

    179 draw. A little big for my liking but doesn’t really change the thesis.

  8. zmann said

    Merril upgrades BTU to buy! Wow!

  9. nltd said

    Z

    Thanks for reply. Trying to gain insight. It helps when needing to ride out some of the ridiculous (counter-intuitive) moves this stuff makes if I can understand better. . .

    N

  10. zmann said

    N – Anytime you’ve got ?s throw them out there!

    Interesting to see gas safely test $7 and rebound. Maybe it goes lower into the close but it may hold here until the weather in early Feb firms up more.

    EOG gettng clocked, down $2!

  11. zmann said

    Nigerian rebels at it again. Gunman stormed the offices of Chinese National Petro Co in Nigeria, took 7 Chinese (brothers?) and a large sum of cash. There’s you’re reason for the rebound of crude from just under $55 this am.

    http://news.yahoo.com/s/ap/20070125/ap_on_re_af/nigeria_oil_unrest

  12. Attacking Mid said

    Sold my two highest delta puts – EOG65, UPL50. Too concerned with a 2:00 rally. If not, there’s always Friday to buy back.

    AM.

  13. zmann said

    Hear ya…better safe than shirtless.

    Oil broke $55 and gas looks like it’s going to try for $7 but we’ll have to see if the closing pump lease oil above or below the whole dollar mark. CNBC is so lame they keep mentioning that oil is up $5 since last week when it hit $50 but they don’t mention that this contract never fell below $51. Arrggghhh

  14. WDKING said

    Hey Z,

    Just when you thought we had too much gas,even us Canadians want in on this action!…

    http://ca.news.finance.yahoo.com/25012007/2/biz-finance-irving-oil-apply-environmental-permits-build-giant-refinery.html

  15. zmann said

    WDKING-

    LOL. Not good for TSO.

  16. Attacking Mid said

    Wow, good thing I sold my puts to avoid the 2:00 pump.

    Resuming contrarian indicator status.

    AM.

  17. zmann said

    AM – congrats on the indicator! :>(

    Gas blew through $7 on the down oil.

    I’m told on my other site that fear is over sub 1.5 Tcf gas at the end of March… that that is what is holding up gas because people are afraid of summer demand and not a good refill for next winter. Maybe but I really don’t think that’s it.

    I think the recent rally was short covering on the cold and some double downs as some hedge funds try to recover losses. We probably will see the effect of the cover tomorrow afternoon in the CFTC data but this sell off won’t show up until the following week (if we stay sold off). I think we’ll see $6.00 in the next two weeks with a LOT of volatility next week on what should be a bigger withdrawal but then weather is warming and gas should continue to weaken. Still stay $5 gas late Feb /early March

  18. Jon said

    I think the Canadians are building the refinery in the wrong place to hurt TSO. We need it out west!

    As you mentioned, Z, gas & diesel on the left coast is very pricey. I keep hearing about the national average falling to $2, but I’m still paying north of $2.80 for diesel at most stations, and unleaded is still over $2.50 last I checked.

  19. zmann said

    Jon, I stand corrected. Misread that one bad. That’s going into an area that has plenty of capacity. Guess I’ve got down with TSO on the brain. My bad.

    On the retail price comment, wholesale prices are down about 6 fold that of retail. That don’t lower as fast as they raise.

  20. walter said

    Thank for the awesome morning write up. I’m oficially addicted to your blog now!

    Just one question. I was told that TSO moved the earnings relase date. Why would they do that?

  21. zmann said

    Walter,

    In my experience…there’s no way to tell. I’ve seen it happen due to everything from SEC investigations (doubt it), deals (maybe), management travel schedules (doubt it), congestion of earings releases with other companies (most likely). My friend of the blog might be able to check on that for me (if he’s reading) and I’ll get back to you if he does. Which way did it go, forward or back?

  22. It is easy to get addicted to z’s site. Well written with a ton of info.

    -SaneO

  23. zmann said

    Walter & SaneO – thanks guys for comments. Actually, my wife tells me it’s got too much info.

  24. neil said

    TSO..absolutely NOTHING to read into….as I said before, good chance they authorize their board to do a massive buyback and announce that with earnings. which could really spike the stock…

    If we DON’T get buyback news we can sell the stock into any strength based on earnings, since everyone and his brother know about West Coast margins from q4.but PLEASE, lets wait til AFTER earnings

    Sincerely

    “Friend of the Blog”

    If youneed to short something before the end of this week, look at HOC…not much upside from here

  25. zmann said

    Neil, Thanks re TSO – Walter, there you have it.

    HOC – 3x burned on that beast but I’m sure I’ll go back for puts again and again – just way too pricey to stay up here.

    Helluva day for you to ask for gassy short ideas this morning, eh Neil?

  26. Jon said

    A couple of Fun facts – sort of energy related – extracted from an article in Machine Design about materials engineering:

    “With every 10% decrease (in vehicle weight) comes a 7% reduction in fuel consumption and associated emissions”

    Shaving 10 kg (22 lb) of steel from an automobile and replacing it with only 4 kg (8 lb) of magnesium, for example, would drop greenhouse gas emissions by 100 kg (220 lb) over the lifetime of the vehicle. That equates to 4 million metric tons (4.4 million short U.S. tons) annually if such a substitution was made in every passenger car produced.

    But America’s increasing appetite for more onboard bells and whistles along with its continued love affair with heavy-duty trucks and SUVs are major counterbalances that designers must over-come. Peugeot, for example, estimates that adding creature comforts such as entertainment and navigation systems along with advanced safety gear has already boosted vehicle weight on average 80 kg (176 lb).”

  27. zmann said

    avatar test

  28. walter said

    TSO earnings- thanks!

    The earnings date went back few days, it use to be on the same day as vlo,sun,mur,xom.

    (maybe that is the reason- getting away from that loser club?)

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