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.
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:
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”.
- 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….