zman’s Energy Brain

oil, gas, stocks, etc…

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Archive for January 29th, 2007

Monday Morning – Busy Week Ahead

Posted by zmann on January 29, 2007

Oil: Last week oil saw it’s first two consecutive days of gains this year and was up $2.02 on the week to close at $55.42. The small recovery was attributed to continued cold weather and reports on Friday that at least Saudi Arabia is complying with agreed upon Opec production cuts even as the smaller players continue to cheat. An unexpected build in heating oil inventories yielded a brief setback to the bulls but they quickly reversed directions and closed the week at its highest level.

This morning oil is off $0.50 in pre market trading. The election of a Muslim to the Israeli cabinet isn’t exactly the same as world peace breaking out but it could be seen as helping to ameliorate recent mounting tensions in the immediate vicinity. Of course, the early morning moves mean little and it’s possible that ever increasing tensions in a place like Nigeria may override the 15 minutes of Kumbaya being displayed by the Knesset.

Opec Watch: Very quiet other than a retread story about Saudi attempting to stabilize prices At $50 (Opec Basket) or roughly $55 NYMEX. See story here.

Nigeria Watch: Militia storm police station and  exchange gun fire with police.  I especially like the part about various militias being funded by rival politicians. Just another day in paradise.

Natural Gas: Gas is holding up pretty well considering this is the most gas we’ve ever had in storage during this week of the year. Click here for more detail on gas storage. Gas traders regained their sanity for one day last week, the only day they had to think about the fundamentals because actual data came out, but then resumed their “keep gas > $7″ campaign. This support is weather based and won’t last long…winter has about 10 weeks left but the first winter relief trend usually arrives in February and that will serve to ease prices. The trick for traders is to smoothly transition from”I think it’s going to snow this weekend” to “have you seen how hot this year is going to be” as they email equity analysts pictures of mountain sized chucks of ice calving off the polar sheets.

The latest weather forecasts call for continued cold in the northeast and a chance for a “plow-able snow event” across the Central Plains to the Great Lakes around week’s end.

It’s Still Pretty Cold…

still-cold.JPG

…But It Won’t Last Long.

getting-warmer.JPG

Rig Counts Were Off A Touch Last Week And This May Be The Start Of Reduced Activity. According to Baker Hughes the number of US rigs turning to the right last week fell 46 to 1,699. Of those:

  • 45 were land based rigs,
  • 20 were drilling for oil,
  • 26 were drilling for natural gas – this was the second largest drop (in shear gas rigs) in the last 12 months. However, it comes on the heals of some recent large rig adds so maybe it’s just a coincidence. Maybe it’s the inclement weather.  It definitely bears watching.
  • Over half the loss in rig count was attributable to Texas and Louisiana, and
  • Drilling activity in three major states is now DOWN vs year ago levels (AK, NM, and WY). LA and CA are barely above year ago levels while Texas continues to be busy with rig counts over 20% above year ago levels – mostly due to Barnett Shale activity.

gas-rigs-012807.JPG

The jury is still out on whether or not the recent statements from Majors and E&Ps alike regarding reduced capital expenditures in 2007 will result in an actual decline in rigs. For oil counts the slowdown is already well under way.

1-year-oil-rig-yoy-comp.JPG

However, as the old adage goes “oil is global, gas is local” and the local price of gas has been holding up a lot better of late than that of oil. For that matter it’s been holding up a lot better than you’d think given the high levels of gas storage but I’ll spare you a rant on gas prices until later in the week. Suffice it to say that as soon as it starts to warm up in the northeast traders goggles will come off and gas will retest $6. At that point the year over year comparison of gas rig counts should start to look like the one for oil above. And then we’re back to that high correlation between the XNG and rig counts I mentioned earlier. Not to mention the impact this will have on the OIH, which strangely, has not fared nearly as well as the oil and gas producers.

And Now For Something Completely Bearish: LNG Expected To Rise In 2007, 2008. Over the last three years, LNG shipments into the US have fallen off as the global LNG market has become more competitive. The EIA just released a report forecasting a reversal of this trend. EIA is calling for mid 30% growth in shipments to occur in 2007 and again in 2008. As seen in the chart below that amounts to an increase in gas supplies of 210 Bcf this year to reach 770 Bcf and an additional 310 Bcf in 2008 to reach 1,080. An additional 500+ Bcf in just two years can’t be positive for gas prices in a market where demand growth typically only runs between 1 and 3%.

lng-eia.JPG

Analyst Watch: HAL – RBC maintained its outperform rating but slashed their price target from $50 to $36 in an attempt to get it a little more in line with the universe. I don’t like price targets because they are static and get stale if the stocks move against you. He should have changed his rating long ago but he, like many other energy analysts, has been is a long term state of denial.

Earnings I Care About This Week:

  • Monday – TSO – the most insulated of the refineries reports first. Given recent price action this needs to be a pretty positive call and a beat.
  • Tuesday – SII, WFT, – bits, mud, other services – check to see if their comments are as rosy as those from HAL and SLB last week.
  • Wednesday – HES – first of the mini-majors to report…could set the tone for MRO and MUR.
  • Thursday – AGU – big fertilizer company – their #1 cost is natural gas so they usually have some interesting things to say about it. APA – first to report of the big cap oil E&Ps. CRR- these guys make propants (basically manmade ceramic sand) used to hydraulicly frac wells. There aren’t a lot of wells being drilled these days that don’t get fracced so what these guys say about demand is pretty important. EOG – first of the big cap gassy names and one I have puts on now so of course I’ll be paying attention. XOM – listen for buyback information…I’m betting they’ll be forced to say it’s going to shrink. MUR – need I say more. PDC – driller, again watching for forward cautionary tone. VLO – will the day never end?
  • Friday – ACI – people who report on Fridays are generally hoping no one notices. I’m only half kidding. Analysts have gotten very bullish on the coals over the last two weeks so we’ll see if Arch supports the newly brightened outlooks.

The Week Ahead: See last week’s picks here. That is not a copout because: 1) Movement in that list was negligible and the same principals/logic/thought processes still apply and 2) I applaud the reader if you made it this far. As far new picks go I’m sitting out through Thursday. As you can see above, Thursday is undoubtedly the most important day of the quarter for earnings. Any bet I make before the numbers and the conference calls would simply be that, a bet. Of course, I reserve the right to change my mind taking action on say, VLO due to TSO‘s comments, etc.

Have a great week and as always, thanks for reading!

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