zman’s Energy Brain

oil, gas, stocks, etc…

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Archive for January, 2007

Wednesday Morning – Lookout Below!

Posted by zmann on January 17, 2007

Exculpatory Clause To Today’s Generally Bearish Comments: Watch out for a potentially large bounce off $50.00.!!! If we don’t knife through it the bounce could be very painful so watch your puts.

February Crude Closed Yesterday At $51.15 Down $1.85. Just in case someone on wants to know you can tell them that:

  1. Year to date, the February crude oil contract is down $9.84 or 16%. That’s a 20 month low. In fact, it looks like we’ll see a $50 with 2 zeros after it today.
  2. Moreover, gasoline which fell $0.06 (4%) yesterday, is off an eye-popping $0.30 or 18% this year.
  3. And heating oil. Who needs the stuff? HO is down $0.17 (10%) year to date.
  4. Then tell them that although we’ve probably witnessed most of the near term damage to crude, although you think it might fall as low as $45 before sharply rebounding, the energy stocks are in. Ah the resilient yet slowly yielding energy stocks. They have not yet, you’ll point out, fully discounted said commodity –rout.

And wallah! You’re me. At a dinner party, barbecue, (insert event here) boring people about the energy markets. Hey, I love this stuff. Especially the part about having been negative on the commodity and the group since September. Check the archives if you don’t believe me!

Opec Watch: Saudi Oil Minister Ali al-Naimi told reporters at an oil conference in India that the market is “significantly healthier” now than it was in October, when OPEC agreed to cut output by 1.2 million barrels a day, Dow Jones Newswires reported. Told you the Saudi’s are tired of bearing the burden.

Fimat Watch: “Certainly the prospect of colder weather and short-covering prompted some buying last Friday,” John Kilduff, an analyst at Fimat USA, said in a note to clients. And “al-Naimi’s comments that OPEC’s current measures are ‘working well’ and that there is ‘no need to panic’ are just as certainly working on sellers … as well.” But “OPEC will probably still come forth with some action or at least some lip service to stem the slide in prices,” he said. Man this guy just can’t let it go! Lip service? You mean like what you’ve been spouting for the past 5 months? Seek help dude.


People Are Looking For Hedge Fund Implosions Ala Amaranth. As Amaranth did as a result of the decline in natural gas prices, so too will (insert hedge fund name here) do for oil. There have just been too many contracts on the wrong side of the trade. When the news breaks you have a only a few days to cover those puts.

Holdings Watch:

  • XOI: The index reached nearly 1,129 (just short of my 1,130 worry level wheh!) and then retreated all day on oil. The group continues to shrug off the demise of that which they sell:


Three Reasons Why This Variance Won’t Last. Even if oil stops dead in its tracks tomorrow and holds in the mid $50s through the end of Q1 the Majors and E&Ps are all extremely likely to see lower levels:

    • PV10’s are going to be off substantially. In 2005, the benchmark prices for oil and gas were roughly $64 /barrel and $9.50/Mcf respectively. Those year end prices are used to calculate the SEC PV10 reserves of both majors and E&P companies. This year the numbers used will be closer to $56 and $6.20 for oil and gas. Those are pretty hefty declines.
  • Finally, such variances never last. It may sound flip but it’s true. Right now owners of these stocks are clinging to the hope of a commodity price recovery while telling themselves that the stocks are historically cheap. Meanwhile the momentum players have turned in the coat tickets and are inching towards the door.
  • XNG: Gas was up, then down, then up. XNG closed exactly flat at 430.47. I doubt we’ll get much of a move until later this week unless gas can test and fail $7 or oil breaks down. I really don’t see gas going much higher than $6.75 and any hint of a warming trend should send gas reeling towards $6 again. In that event look for the XNG to re-break its 200 dma to the downside at 423.66. In that case I’ll be adding to February puts on APC, EOG, and especially UPL depending on what oil is doing at the time of course.
  • OIH: The service stocks traded quietly today while the bashing of the drillers continued. Rigs are being freed up onshore and weakness is becoming more widely expected in the shallow waters of the Gulf of Mexico. Continue to like puts on PTEN (which has enjoyed a 10% rally in the last 4 days), and will be talking a hard look at PDC and PDE on any significant strength.

011707drillers1.JPGclick to open.

Analyst Watch: TSO upped to outperform at FBR (anticipating a bounce off $50 are we?), PVR cut to neutral at Lehman. Other than that more apathy.

Odds and Ends: Cold Ruins Nearly $1B of Calif. Citrus. I hate to repeat myself but like I said yesterday, it’s time to buy milk folks.

Posted in Uncategorized | 12 Comments »

Just A Few Of Housekeeping Items

Posted by zmann on January 16, 2007

Wow! In a little over a month we’ve gone from 300 to around 1,000 hits per day with peaks twice that high. Comment count has risen as well and I’m fielding several emails a day from both investment and energy sector professionals in addition to the comments made on the blog. My sincere thanks for your patronage!

On to the housekeeping items:

1) I’ve added an RSS feed at right (the little powered by icon) which offers a variety of ways to get the morning post from plugging it into your home page to making it a part of your morning news feed. Please sign up and let me know what you think. Of course you can still subscribe to get the post by email.

2) To maintain continuity and timeliness of my responses I would ask that if you have a question or comment that you please post it under the current day’s main page unless it’s really meant as a site suggestion for the suggestion box).

3) Finally, due to some of the limitations imposed upon blogs at wordpress I have opened a backup blog on blogger. I am still working on some formatting issues and haven’t decided if it will be my ultimate home but feel free to check it out (and if you feel like checking out some of the adds on the new site, well, that won’t hurt my feeling s either).

Again, thanks for your support.

Posted in Uncategorized | 1 Comment »

Testy Tuesday

Posted by zmann on January 16, 2007

Ahhhh, It’s Good To Be Back! I hope everyone had a great MLK holiday!

Oil Is Softening A Bit This Morning. Down $0.91 in electronic trading to $.52.08. Don’t be greedy. If you still have January puts this could provide your last chance to roll out of them.

  • It finally got cold but it needs to last. Forecasters have been calling for a cold blast for mid January for over a week now and here it is. Now it needs to stay cold for at least two solid weeks to make up for some of the tropical weather we enjoyed around the holidays.
  • Certain Elements of Opec Are Demanding Further Production Cuts. However, since October, Saudi Arabia has cut more barrels than the combined cuts of the remaining cartel. In December Venezuela and Iran, the two staunchest advocates for the prior two rounds of production cuts, actually registered production increases. Saudi seems to be on the fence this time having borne more than their full share of price support efforts in the past. What that’s phrase? Fool me once shame on you…fool me twice…don’t fool me again. Words to live by Saudi.

  • And Opec Crude Shipments Are Actually RISING Now. Dow Jones reported that tanker tracker Oil Movements said crude exports from OPEC countries are expected to rise 350,000 barrels a day to 24.5 million barrels a day in the four weeks ending Jan. 27, despite OPEC’s announcements to reduce production by 1.2 million barrels of oil a day starting last November.
  • And Finally Opec Seems To Be Shying Away From Another Emergency Meeting. According to AP, an official at Opec’s Vienna headquarters who asked not to be identified because she was not authorized to comment, said such a meeting was unlikely… at least for this week. Surprised SHE answered the phone at all.
  • Venezuela To Nationalize ‘Absolutely All’ Of Its Energy Sector. This should actually support oil. The last remaining un-nationalized oil region in Venezuela was the heavy crude rich Orinoco Belt (reported to be the world’s single largest hydrocabon deposit). Chavez has been anything but good for Venezuelan oil production. Since Hugo took office in early 1999, oil production is down 470,000 bopd or 16%. That’s a lot of Bolivars. Meanwhile, Opec production was up 7% over the same period. Maybe Chavez’ call for cuts has less to do with posturing and more to do with saving face since he simply can’t make his quota.


  • Who Gets Hurt Besides Venezuela’s Citizenry? BP, COP, CVX, XOM , and TOT. They’ve been given the option of retaining minority interests in their own operations (the state run oil company PDVSA had held an average 40% stake in all the major oil company JVs as of last Friday. What’s more, producers have been told to cut production yet again. Gee thanks! What a deal! Where do I sign? Oil companies were heard to say none of the preceding. REP on the other hand has already announced its immunity to the new Bolivaran order taking place in Venezuela and it could benefit greatly from any firesales conducted by the other majors who are just fed up (XOM) with the country.
  • By the way, that production slide in chart above was managed with the help of the previously stated big five plus Statoil. Imagine how steep it will be without their technical expertise to upgrade all that sludge. Oh well. Here are just a few examples of projects that the big five helped develop in the Orinoco which in aggregate produce 600,000 bopd and on which the big five are now getting the shaft:


  • CVX Refinery Fire – Impact Unknown. Chevron reported a small fire at its Richmond, CA refinery which has been extinguished. These could provide early, but I’d expect very fleeting, support for gasoline and heating oil unless it turns out to be a multi-week outage. CVX should have more on the fire’s impact later today.

Natural Gas – After a 7% data-based tumble on Thursday, traders managed to whip themselves into a fundamental state of denial Friday. I think they saw what an awesome time the boys over in the oil pit were and just couldn’t stand to be left out. This induced a 3Tcf sized blind-spot in their vision allowing them only to see the BUY button on their terminals. And buy they did rallying gas 2/3rds of the way back from Thursday’s slaughter. Some things to keep in mind for the coming week:

  • HDDs this week were 180, slightly ahead of earlier estimates but still 20% fewer than normal. This will be the second highest degree day reading this winter after the week ended December 9th when degree days totalled 215 and 168 Bcf were withdrawn from storage.
  • Coincidentally, the coming week’s HDD estimate from the CPC is 215. If we get 168 Bcf next week then you know the whole game is rigged!

CFTC Data Shows Tide Is Turning For Gas Shorts. While gas was only off one of the past five trading days, the net position in Nymex gas fell by 10,000 contracts (lost 5,000 longs and added 5,000 shorts) to reach net -16,000, its lowest level since may.


Holdings Watch: Make no mistake. For the stocks everything hinges on the direction of oil right now. I have a few remaining January positions (do what I say, not what I do) but for the most part I’ve rolled to February and longer. Friday was disappointing and I was too stubborn to ditch most of my remaining Januaries since they’re all very near or in the money and I just didn’t believe the action would last. Even my favorite whipping post MUR was up and they pre-announced numbers that were so low to the Street you could have sailed a VLCC through the gap! I’m into February and beyond on coal stock puts and if I don’t write about coal any more this week it’s because of a lack of fresh data from the EIA. Anyway, on to the numbers.

XOI – May get hurt a little early this week as several majors get grazed by Hugo’s greed (and utter lack of foresight). However if oil rallies significantly all bets are off. Technically speaking the chart should bounce lower off 1,130 (just 3 points above us) and head back to test last Thursday’s low of 1,093. As such I’ll be losing the Januaries if we sustain 1,130 more than just briefly. Fundamentally I expect two or more large cap or major warnings this week with the approach of earnings season combines with the apathy of analysts.

XNG – At 430 adn wouldn’t be at all surprised to see 440 before turning down later this week. At present weather forecasters are expecting a slight warming towards month end but if this changes gas will breach $7 and the XNG will rally over 450.

OIH – Expect warnings from onshore and shallow water drillers to increase. We’re at a critical level on the OIH and any close over 133 will cause me to enter into February puts on BHI, some of the land drillers, GSF, and several other favorties.

Analyst Watch: Analysts remain defiantly bullish. Cantor cut tankers OMM and GMI from buy to hold.

Odd & Ends:

Orange Juice Crop – Frozen Before It Went In The Can. This weekend the other OJ got some very bad news. According to Accuweather the California citrus crop was subjected to a freeze similar to the one in 1990 which destroyed 85% of the crop. Now we’re all apple juice and milk people around here so we’ll be fine but to me this looks like a textbook base breakout. For those of you with futures accounts who don’t want to chase it I’ve noticed that in the past class III milk usually moves well on big moves in OJ. Everybody drinks one or the other.

Posted in Uncategorized | 24 Comments »

Just for Jamie!

Posted by zmann on January 15, 2007

And A Happy MLK Day To You Too!
Jamie I’m glad you like the site and I’d hate to be accused of shutting down the clinic for too long. How about some bullets?

1) Opec still threatening emergency meeting. yawn

2) Venezuela nationalized “everything energy” on Saturday – not good for the majors both foreign and domestic who have ops there but probably a boost for oil. I’ll have a nifty chart of Venezuelan production both pre and post Chavez tomorrow.

3) CFTC data shows the net nat gas position turned down again last week. This weather will have to hang on quite some time for the shorts to be really pushed into covering.

4) Oil – probably up early in the week on opec jitters and the ice storm in the midwest. The flat to slightly down on inventories although that’s a hunch and not worth betting ANY JANUARY POSITIONS ON (well maybe some day trades on Thursday but we’ll have to see).

5) The stocks were strong most of Thursday and were exceedingly strong on Friday. They should run into a little resistance very soon (within a few points on the XOI) however if they break through look for Goldman and others to pump away (“goldman sachs loves anacott steel”).

6) Heating oil should see another goodly sized build Wednesday but traders will be looking forward to next week’s number when the cold weather shows up in the data. However, that week will probably show yet another build since the home tanks are full and the distributors have had ever chance to top off at cheap prices over the last two months

7) Natural gas is more immediately reactive to cold. This week will be a bigger draw than the past three high 40 something ones though almost certainly not topping 100 Bcf. Once again traders will salivate over next week’s draw – definitely 100-150 Bcf which falls into the range of normality for this time of year. For gas everything will hinge on the directionality of the two week forecasts – cold stays = gas up.

8) So that’s my impromptu 15 mintues of musings. I’ll have more to say in the morning so stay tuned! And as always, thank you for reading.

Posted in Uncategorized | 4 Comments »

Friday Morning – 1/12/07

Posted by zmann on January 12, 2007

Well, I Didn’t Call It Thursday Thrashing For Nothing!

  • Natural gas got popped for 7% but more on that later.
  • The pendulum has probably swung a bit too far and definitely too fast (as usual). I’ll be looking for every opportunity to lighten up on the puts and may take a call or two for an “Opec’s going to pull something over the long US weekend” play. Probably SU or VLO or something just as wildly volatile and highly oil correlated.

Oil – S.S.D.D. Rally a little, retreat a lot. Sad really. We’re set up to see similar action today although the long weekend and Opec threats should be able to keep oil positive. Tell me how this doesn’t hit $50 soon if not $45. Notice in this long term chart how you always get a rounded bottom on the change in direction. You’ll have time to buy calls on energy stocks. There is no reason to catch a falling knife here except for a quick trade!

Opec Watch: Rumors of an emergency meeting. Hey guys I thought it was about inventories and not price. US crude inventories continue to fall so what’s the problem? Oh, I see. You thought that falling crude inventories would lead to more stable prices but you didn’t count on the massive builds in gasoline and heating oil stocks. I gave you my master plan for correcting the situation in yesterday’s post…just do it…the rest of the world can’t stop you and what do the rest of us expect anyway? You’re a bloody cartel so act like it!

Fimat Watch: Since these guys get published somewhere with a silly bullish/inane comment on a daily basis I just had to add a Fimat Watch. “The impact of the weather should not be overstated. Heating demand is a comparatively small part of global consumption,” said Antoine Halff, an energy analyst at Fimat. “There’s potential for a rebound.” I especially love that last line, “potential for a rebound”. Now that’s some concrete analysis. ROFLMAO! When these guys capitulate I’m going ALL IN LONG! Just shut up instead of babbling daily about how prices should be higher. It’ll happen but bagging your estimates and calling every reporter you’ve got on speed dial won’t make a difference! I really miss Melissa Francis! She would have taken these guys to task!

Natural Gas Had A Very Bad Day…Falling $0.46 (7%!) to $6.29 on the February contract. The last three withdrawals have been below 50 Bcf (47,46, and 49) at a time of year when 120 to 150 per week is the norm. Say what you like about the approaching weather but unless the Sun takes leave of the solar system we’re going to have a lot of gas in storage at the end of March. For its part, NOAA said it sees warmer than normal weather for the U.S. persisting through March which would seem to contradict the recent dire forecasts calling for a month of Arctic blasts. For a better summary of the gas storage numbers look here.

…Look For Gas To Trade With Heating Oil Today. Illogical as that may be, the long weekend and threatened cold could send oil and heating higher today and gas is likely to at least find support here. Next week we can resume our downward course on the way to a failure of $6 gas. My one caveat would be that if we somehow, maybe with the help of a warmer weather report, crack $6.18 then gas could move lower fast for that $6 test. Once we warm up again I fully expect gas to crash back to $5.50 in late January and to $5 by early February.

Stocks Tread Water. Stocks did a lot better than you’d suspect on a day in which oil and gas got shredded. Lots of early buyers got burned though as brokers called for bargain hunting and at least two rounds of buy programs kicked in. Every time this happens it makes the next time the brokers say, “it’s time to buy this dip” that much harder to pull off. I’m still in puts on APC, EOG, MUR (not enough but that’s a problem to have!), BTU, EEE, and PBW and a goodly bit of cash for the long weekend. Of course, I still like puts on the refiners, especially SUN and VLO (although they’re all suffering), BHI, PTEN, and am looking for an opportunity to buy puts on HES but probably won’t add any puts for carrying over the weekend unless oil gets out of hand on a rebound (>$54.50).

Adding XLE To The Hit List. It’s an ETF holding the “whose who” of energy names but is very heavily weighted towards XOM and CVX (36% of assets) which happen to be the two most expensive majors out there. COP is another 10% or so of the fund and it has its own set of problems. Very near term support is 4% below current levels at 52. Interesting the XLE has found a bottom around 51 three times this year in Mar (when oil was $62), June ($70) and early October ($62). So here were are at $54 but oil is all $10 lower!

  • XOI – Down Slightly. rebounded above but then closed well below the 1,100 mark and very near it’s low of day at 1,092. Next stop 1,080 which we may get this morning on the MUR warning (see below) if oil cooperates.
  • XNG – Ditto. Still headed to 400 and then 380 in conjunction with my position on natural gas outlined above.
  • OIH – Down 0.9%. Still heading for 120.

MUR – Warned After The Close. Estimates 4Q of $0.40 to $0.45, down from past guidance of $0.40-$0.60 and much lower than Street consensus of $0.65. The Street had 4Q EPS at $0.95 just three months ago. Talk about a state of denial from the analyst community. Key takeaways of the shortfall:

  • R&M margins were weaker than expected. This is the third company after COP and CVX to warn on refining in the fourth quarter. That it happened is no surprise at all given what happened to cracks during the quarter but that analysts hadn’t shagged the data and adjusted numbers yet is! All the other majors, mini-majors, and refiners have drafted their press releases by now.
  • 4Q Production was lower than expected. 4Q production was 92,000 boepd, down from October estimate of 94,000 boepd.
  • More Dry Holes. This month it’s an exploration well off Malaysia described in presentations as “large gas prospect”…it’s now a $22 mm dryhole. This comes on the heels of the disappointment of the 100-200 mmboe Thunder Ridge prospect in the GOM in late November.
  • MUR is still trading at a fat 12.5 times 2007 consensus earnings. See yesterday’s note for a look at how this compares to its peers.
  • Summary: I still like this for puts although I ‘ll be selling the initial reaction and rolling into the February’s on the bounce. It makes me like the HES put idea a lot more since that stock hasn’t been touched by the 2007 sell off but essentially does the same thing albeit on a slightly larger scale. True, it’s cheaper but it should be sliding with its peers.

COP’s Organic Reserve Replacement Was Abysmal; Do High F&D Costs Loom? 300% reserve replacement. And over 96% of that came from the acquisition of Burlington Resources and increased ownership in Lukoil? So you guys barely edged your production with the drill bit? Man. AG Edwards even called into question the quality of COP’s prospect inventory. That’s gotta smart! What really scares me is the early release of the numbers like they were something to be proud of. Or did you not want to wait and release this when you had compiled your finding and development costs? Are they going to be that bad in lieu of the current forward deck? It’s not going to be hard to figure out that you guys paid to much for BR, you might as well go ahead and spill it all at once. Now we have to wait for the other shoe to drop.

Analyst Watch: BTU upgraded at Citigroup. That’s 3 upgrades in as many days. I’ll hold my Feb $35 Ps though this and reevaluate next week. THX downgraded to neutral (FST bid for THX on Jan 8thand their stock fell through all semblence of support this week. On MUR, no downgrades and only price target reduction from UBS who already rate the stock Reduce. They cut their target from $46 to $45. Shouldn’t that be a Maintain/Hold rating? That’s where the stock is now. The other analysts are either asleep or expect to have to slave their estimates by over half in the last 3 months. Talk about complacency.

Posted in Uncategorized | 51 Comments »

Thursday Thrashing – 1/11/07

Posted by zmann on January 11, 2007

Oil Got Waxed Yesterday…Again. And it’s down to $53.50 as I type this have dipped into $52 territory late last night. WOW. The February contract is down $8 since the beginning of the new year! Opec is once again calling on it’s members to comply with the cuts from October. Since it’s gas inventory day I’m going to devote most of today’s post to gas and the stocks but what a humiliating kick in the crotch for Opec! You guys had better skip the teleconference and catch a charter to Dubai. Of course a call to your local MEND representative wouldn’t hurt either. But if you really want to raise oil prices you’ve got to think big:

  • How About Taking A Week Long Production Holiday? Let’s see, that’s 26.5 million bopd for 7 days or 185.5 million bls off the world market in one week at a cost to you (Opec) of $55, $54, $53 per barrel which comes to $9.8 billion you won’t be seeing that week. We’ve got to have everybody in on this. No cheating…I’m looking at you Iran and Venezuela.
  • However, On The 8th Day You Start Pumping. And you pump more oil than before. You pump 30 million bopd even on the weekends.
  • On the dawn of the eighth day the NYMEX takes your oil of your hands for a much more respectable $100/barrel and the price drops by say $10 /week for the first 4 weeks and then holds at $60.
  • It’s A Win-Win-Win For You Guys. First, you’re paid out with the pop to $100 and the increased production in about 4 days. Secondly, your weekly revenues at $60 are 28% or $2.8 billion higher than when you started, and lastly, no one will ever accuse you of crying wolf again.

Goldman Sachs Sees Oil Rebounding, Not A Little But A Lot. This a direct quote. “We would see some weakness forthcoming,” probably “below $50,” but then oil prices are going to rebound to “the high 60s,” said Jim O’Neill, the head of global economic research at Goldman Sachs Group Inc. “The underlying influence of high users, China, India, is becoming more important.” Two words: Perma Bull. Hurray, It’s Natural Gas Inventory Day!

  • My Estimate: 42 Bcf withdrawal based upon heating degree days of 147.
  • Consensus: 45 Bcf with a range of 37 to 75 according to Bloomberg. 75! Really?! You need to get out more pal. It could happen (it’s a survey and a government run one at that ) but I doubt it.
  • Weather Comment: It’s getting colder this weekend and for the next month if Accuweather has anything to say about it. Next week’s number will be pretty small for this time of year as well as HDDs are expected to only rise to 173 this week. Moreover, looking at the scattering of degree days the coolest stuff was out west and not in the heartland where we can tunnel through a lot of gas in a week. That’s the first 12 days of January all shot to heck as far as gas demand goes.


EIA Chops Its Forecast For 2007 Gas Prices. EIA now expects Henry Hub to average $7.06 /Mcf this year, down 10% from its estimate last month of $7.87. Comment – none other than to say they’re still too high. We should be at $5 in late February or early March unless NYC freezes over for at least a month.

The Stocks: Energy stocks continued to suffer as oil made a series of lower highs and lower lows yesterday.

  • The XOI broke through my 1,100 key support level, rallied briefly back over it but then settled near its lows of the day down 1.7% at 1,097. Minor support is at 1,080 followed by stouter stuff at 1,045. That 1,045 level was set in the last week of September when oil was $10 higher than current levels.
  • The XNG continues to slide but only modestly. Held up by the approaching cold, or as traders are calling it, “The Great Arctic Hope” the gassy stocks of the XNG are slowly conceding to oil and the fact that everyone knows it needs to get cold and stay cold through March just to support current gas prices. The XNG flirted with its 200 dma yesterday for the second time in a week and once through it, is set to fall at least 6% to support in the 397. It won’t happen for two weeks but it will happen. You don’t want to talk about levels lower than that because there’s absolutely no support and the go money won’t be able to find a wide enough doorway to run through. I’m thinking that’s what’ll happen beginning mid February.
  • OIH – You’d think business was terrible here. Not so but see below. Technically speaking this group has gotten bashed. I’d expect weakness to continue as long as oil trudges toward $50 but to moderate towards the 119 level. On a minor bounce I like puts in BHI and PTEN but am currently underexposed to the group with only a small position in OII.

BTU Catches Two Upgrades And Closes Up $0.22. What can I say to those analysts but the trend is not your friend. This week, coal has taken a hiatus from the daily pounding it was taking and CNX got an upgrade as well but it still wasn’t enough to light a fire (so to speak) under the coal sector. Of course, overproduction will do that to an industry.

NOAA To Speak On El Nino Today. They do this once a month and the last release was December 7th when they said the event was strengthening and was likely to continue to strengthen over the next 1 to 3 months. Traders are likely to read this very quickly. If the report says weakening has occurred (Pacific SSTs are moving towards the long term mean) then look for gas to make a run on $7. Unfortunately no time of day is specified for the release so I’ll just hit refresh here periodically.

Analyst’s Continue To Quietly Cut Numbers. The following is an overly simplistic yet effective snapshot of how the analyst community is treating the recent slide in commodity prices. The table shows the change in consensus EPS estimates over the last 30 days for the current and next quarters as well as next year. It also shows the corresponding change in stock price and the current forward PE multiple. This last bit of data is useless in a vacuum (without the historical framework that I am very slowly adding to the Valuation tab) but it does let you compare peers.

  • For instance, it’s interesting to note that while XOM is the most expensive of the Majors (in terms of forward PE) it has fallen the least over the last month.
  • Conversely, MUR a name I have often picked as being a mini-major without the benefits of a massive buyback is also the most expensive in its group but has fallen the most.
  • Also of note is the brutal but very quiet slashing of estimates going on the E&P group. Note that the longer reserve life gassy guys carry some pretty astonishing forward multiples. SWN I don’t touch on the short side however EOG has been a favorite pummeling post of late and still has room to fall.
  • The refiners as well have their own set of problems but this data doesn’t show much except that I think yahoo Finance has some bad data for the fourth quarter on TSO.
  • Finally, I’ve included an assortment of service and drilling names which should be categorized separately for valuation purposes however my point here was to show that Wall Street hasn’t been changing estimates here. In this case it’s not that the estimates aren’t falling like the other groups but it is that they ARE NOT rising. Looking back three months ago you would have seen continually rising numbers from the prior three months. We have anecdotal evidence that rates (at least onshore) will be coming down soon as rigs are freed up. Further, service costs could not continue rising or the only company capable of paying for them would have had to be selling Ipods.


Analyst Watch: Nothing. Like I said…very quiet.

Posted in Uncategorized | 37 Comments »

Watchful Wednesday 1/10/07

Posted by zmann on January 10, 2007

Oil Had A Crazy Ride Yesterday. Oil dropped as much as $2.21 yesterday to a new interday low of $53.88 before recovering most of its losses to end the day down only $0.45 at $55.64. The chart still looks hideous and the reasons for its slide still remain in place:

  • Too much oil in storage in the US and Japan and now apparently in Poland, Germany, Hungary, and Russia as well (hats off to Putin for inadvertently confirming that yesterday through his mulling of curtailing output). The last Vlad that caused this much trouble in Europe just impaled people in large groups – he didn’t threaten to let them freeze. Hopefully we won’t have to start calling Putin Vlad, the curtailer.
  • Persistent lack of winter – I know it’s a season but maybe we can coin a new name for it. How about Spring, Summer, Fall, and Temperate? Seriously, every time I wear a T-shirt and shorts outside in January (and break a sweat) I feel like running back inside to go long OO and short ACAT. What greater proof do you need of global warming than faling sales of snow mobiles and rising sales of sunglasses? Just kidding. They’ll always need snow mobiles around Denver. By the way, forecasted temperatures for the weekend in the nation’s southern mid section have jumped about 5 degrees in the last two days.
  • Opec continues to cheat. I’m not going over this again this week but here’s a long but very good article on Opec’s cheating ways, how Putin’s growing oil empire is frustrating Opec and how all that relates to oil, gold, and everything else.
  • More sellers than buyers as the February contract breaks key technical support at $55. They will reassert their presence again when cross that boundary. Note how the chart fell apart at 6:00 EST yesterday – the volume for that time of day was size! Note also that rally on this side of the pond didn’t occur until the Europeans were safely out of the way. Oh look, the Europeans are awake again and oil is down $0.70 and toying with that $55 mark again.


CNBC did its share of pumping with guest after guest saying that this weakness is only temporary and that Opec’s recent cuts will balance the market. CNBC even cited our very own EIA as claiming that a disruption of oil supplies coming out of Opec could cause prices to rise as high as $65. Really? And if a comet hit the earth how much would prices fall on the surplus created by the fact that no one would be driving? Opec’s about as likely to follow through on its “cuts”. Whose side are you G-men on anyway?

No matter, everything rests on today’s inventory data. Surveys of analysts and traders call for:

  • The expected change in Crude Oil inventories ranges from down 500,000 barrels (Bloomberg) to up 800,000 bls at Dow Jones – they really should try to call the same guys but obviously some outlier in the Bloomberg survey is trying to skew the game.
  • Distillate Up 2 mm bls
  • Gasoline Up 2.6 mm bls

Opec Watch: Rumors Swirl Like Robes In A Desert Wind. Lots of rumors regarding an emergency meeting. Lots of emergency phone calls. Lots of cross currents. Iran and Venezuela definitely want to accelerate cuts– since they didn’t abide by the last round of cuts and others did it must seem like a win-win for them. Qatar is rumored to be accelerating the Feb 1 cut to now but who knows.

Putin Watch: Man I Wish This Guy Had His Own Apprentice Show! In telephone talks with Belarus. Winter apparently is the time for applying leverage. Putin claims Belarus was siphoning oil from the ironically named friendship pipeline. At the same time Putin told his cabinet that Russia will lose $3.3 billion over natural gas agreements that were designed to favor Belarus and “support our Belarus colleagues.” So on the one hand Belarus is a thieving regime and on the other Russia is getting bent over support them? Just like the recent “environmental squabbles” at the Sahkalin developments that were pronounced clean and pure once Russia gained majority control of the projects I’ll bet that here a renegotiation of those oh so generous gas contracts yields a reopened oil pipeline.

Natural Gas Is Starting To Bounce… As I said yesterday, gas would punch back towards $6 if oil could hold it’s early morning losses. Oil rallied and gas, after managing only a nickel decline in the morning rallied to close up a completely idiotic $0.25 to $6.63. The rally, now up 10% in 2 weeks, is due to the blue stuff seen here making its way slowly eastward for the first time in nearly a month.

…But It Should Be A Brief Rally Before Tripping Below $6. Given: 1) the record amount of gas in storage at year end, and 2) the prospect of at least two more wimpy withdrawals to start the month of January I think this rally will peter out soon (heating degree days were only 147 last week and won’t break 200 this week either). Once the cold weather gets here and forecasts start to warm up again on the other side of it (as forecastors believe it will be fairly short lived) we should see gas fall back for a test and ultimate failure of the $6 level.

This is what’s got gas jumping: Chief Long-Range Forecaster Joe Bastardi believes that if the weather pattern reaches its full potential, the dramatic change from warmth to cold could result in “one of the top-five coldest 30-day stretches in the past half century“. Bastardi is predicting bitter colder from mid-January to mid-February and even commented that many natural gas stocks could spike as inventories correct themselves. He sees an end to or weakening of El Nino causing this shift in the jet stream. Shift or not he’s behind the rally in gas prices and he should know better than to talk about stocks – but, what do you know, he’s a regular guest meteorologist on CNBC. I especially like his comment that too mamy forecastors rely on models these days and not on history. Right, stupid computers don’t know nothing. Me feel cold coming.

Analyst Watch: BTU started at Buy at B of A (Ouch! for today but he really should have waited for gas inventories to drag it a bit lower. Still, I’m glad I rolled this one to the Feb 35s on Monday and may double when the dust settles). BP cut to neutral at Bear Stearns.

Holdings Watch: The XOI had a pretty bad day considering the recovery in oil prices. Aside from XOM, all of the majors were off heavily in the morning and those lows carried through in the afternoon. —Aside: Yes I’m a bear at present but I think XOM‘s buyback program, flagging though it may be is not the only problem for shorts with that story. The real problem is the vaunted, safety stock status XOM has been granted by the Street. — While some mid and large cap E&Ps managed to break even on the day, their trading volume was well off average levels. Conversely for those names that remained down all day volume was high.

  • XOI – down 1.6% today to 1,116. 1,100 is your next critical test with the 50 and 200 dma ‘s left behind at 1,180 and 1,133 respectively. That grey candlestick skulking around at the bottom of the chart is oil (USO). Thanks to Lou last night for pointing out that another major, CVX, just warned for the fourth quarter. That won’t help this chart and if oil cooperates could be the impetus needed to give us that 1,100 test. Also note in the chart below how the late morning rally failed when the XOI bounced off the 200 dma from underneath.


From a longer term perspective the XOI (Big Oil) looks to be running out of steam. I threw in the USO ETF from inception last year for perspective.


And Valuations Appear Stretched. The XOI is composed of 13 large cap, mostly oil focused stocks. From APC to XOM it is a whose who of mega cap energy names. I’ve added a Value Page ab(see top of blog at right) and will continue to add long term forward valuation graphs for select energy companies and (later) groups of companies. For now, suffice it to say that valuations, while not exceeding expensive for your run of the mill stock are pretty “up there” for the energy group.

Odds and Ends: If you haven’t seen “the absolute coolest thing ever“, at least this week anyway, you really should. My brand new 30G V Ipod looks so 2006 compared to this! I dare you not to play the demos. Note: if you have a ROKR forget what I said and do not click on the above link- you don’t need that kind of frustration.

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Tuesday Morning – 1/9/07 – Energy Going Lower

Posted by zmann on January 9, 2007

Oil Is Plummeting In Pre Market Trading.After a pretty weak attempt at a rally yesterday morning oil closed off $0.22 to $56.09. In early morning trading it’s down $1.73 to a new low of $54.21.  The slide this morning is so far being attributed believe it or not to warm weather, doubts about Opec cuts (see below), and they possible cessation of the blockade of Russian oil going to Belarus (and thereby Germany and Poland).

Inventories Expected To Rise According To The Latest Bloomberg Survey: Normally  I’d say the following estimates are insane for this time of year and I do think the crude draw will be bigger but the other two really aren’t so rigged as to be obvious. There’s just so little weather bases demand and with refining cranking back up they are reasonable.  And the survey estimates are:

  • Crude Oil down half a million barrels
  • Distillate Up 2 mm bls
  • Gasoline Up 2.6 mm blsl

Opec: Once A Cheater… According to another Bloomberg survey, Opec output fell by 245,000 barrels a day last month and declined 550,000 barrels in November. Comment – That’s a far cry from 1.2 mm bls gentlemen of the cartel. That’s less cohesion than Ohio State’s offensive line last night! Saudi, if I were you I wouldn’t should the brunt of the cutback to support Iran…they’ve got a big army you know. That’s just me you do what you want but word has it they’re buying military hardware with those excess petro dollars. They can’t be worried about the U.S., we’re busy. Anyway…

Gas  Continues To Tread Water. Gas traded up $0.19 to $6.39 with oil on the hopes that an approaching cold air mass will prompt the first bit of serious demand this winter. This morning it is up a penny in the pre market but if the losses hold or build for oil today I’d expect we’ll get another shot at $6. Gas prices have been flat and then slightly up over the last two weeks despite the fact that only 93 Bcf of gas was pulled from storage in the back half of December. Average demand for gas in December general results in 450 to 500 Bcf being withdrawn over the month.

Analyst Watch: SJT from hold to Buy. I will buy puts on this (no matter the spread) if it pops. It’s a pure royatly trust completely dependent on the price of gas yet AG Edwards put it on the buy list. They also updraded HGT to Buy, another RT. BEXP goes from over to underweight at JP Morgan.  No stop in between means they messed up or ticked off the analyst. REP downgraded to Sell at Deutsche Bank.

Ratings Comment – The shear lack of names on the my daily analyst watch list over the last several months points to complacency. It tells me that Wall Street is building up an avalanche of downgrades but doesn’t believe commodity prices will force them to actually publish. While they aren’t really upgrading lots of stocks  the lack of downgrades and accompanying price target reductions is deafening. Silence is deadly.
Holdings Watch: Added back the BTU and doubled my APC position with some $42.50s to add to my $40s. Also added some OIIs on Phil’s suggestion – it was up 5% and was just too tempting to pass up.

Odds & Ends:

GE Buys Privately Held Oil Service Firm. I find this interesting both strategically and from a valuation metric standpoint. Pointing out strong global demand for energy,

  • General Electric Co. said yesterday that it agreed to buy oil services company Vetco Gray Inc. for $1.9 billion from a group of private equity funds. Vetco Gray provides drilling, completion and production equipment for oil and gas fields.
  • The business is forecast to generate more than $1.6 billion of sales in 2006. So it’s being purchased for 1.18x sales.
  • The market is valueing other service firms a little more: SLB (3.9x), BJS (2.6x), BHI (1.8x), and HAL (1.3x).
  • Based upon the multiples above it looks like GE got a pretty good deal. This would almost be a buyunder had Vetco been public. Not a good sign for pricing in the service sector if the private equity firms (including JP Morgan) let this one go so cheap! Maybe that’s what this chart of the OIH is telling you.

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Monday Morning 1/8/07

Posted by zmann on January 8, 2007

Oil Up Strongly In Pre Market. This morning oil is getting a boost from: 1) heightened rebel activity in Nigeria (these guys definitely watch CNBC for cues about when to act), 2) reports that an “Artcic Blast” could send temperatures plummeting across the Eastern Seaboard around January 20th, and 3) increasing talk from Opec nations that another energency meeting is needed to shore up prices. Oil is just over $57 at 8pm eastern but I don’t really get concerned unless it breaks $58 which I very much doubt will happen (unless of course rebels show up in the GOM and then all bets are off).

Gas Is Up Too Much. In early trading gas is up a whopping $0.28 to $6.46. Simply ridiculous. Yes, the second part of the month looks colder although Ive read several weather blogs from reputable meteorologists (I know, I know, I need a hobby) and there is much in question as to the severity and breadth of the “artic blast”. This weather blogger makes it sound like any major changes in the warm weather pattern the US has enjoyed will be very short lived. At nearly $6.50 for the front month contract gas is out of control when you remember that we were in the mid $4s back in September before any knowledge about short sleeve weather in January nor just how big a storage surplus that would lead to. I’ll updated production data tomorrow but suffice it for now to say that gas production continues and that the current supply overhang is not just related to successive warm winters.

Stocks Appear Likely To Continue Friday’s Bounce. Early indications show 1 to 2% upward moves for the usual suspects and I’ll be waiting to see how far “artic blast mania” can carry the group. I’m betting that hedge and mutual funds alike will transitions from a long period of buying the dips to one of selling the bumps. We should be able to tell if the XOI and XNG fail to break through last Wednesday’s closing lows and if we begin to see a pattern of morning rallies followed by more volume selling after the close of NYMEX each day.

  • I got stopped out of my two biggest positions last week, BTU and MUR and will take my time before reentering.
  • I may take some very short term calls on gassy names: EOG (I have puts here now), KWK, CHK (very favorite) , SWN. Oil names: SU and VLO. On the service side BHI and RIG have been much abused. Fundamentally I don’t believe the group should go up but if there’s a bounce to be played (and that’s all this will be then I’m game). Oh and I may of course play the ultra cheap premium XOM as it’ll be the last to turn back negative when the bounce fails.

CFTC data was not released Friday.

Baker Hughes rigs count rebounded 12 – a non event but certainly aren’t seeing a big decline in rig activity yet but most operators continue to say it’s coming with lower gas prices.

Analyst Watch: ESV to underweight at JP Morgan (Wachovia beat them to it last Thursday- the offshore drillers are starting to lick a little picked upon). Wachovia cited “the increasing threat of an overhang in natural gas storage” and that it “sees additional downside as activity metrics worsen and service companies give 2007 outlook below consensus.” — I wonder what tipped them off?! UBS initiated coverage of KBR with a neutral.

Sorry for the short post this morning but our heat went out during the night and I’ve got to get on top of the situation. This rebel problem is really getting out of hand!


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Finally Friday 1/5/07 – Round 2 Goes To The Bears

Posted by zmann on January 5, 2007

The New Year Has Not Been Kind To Commodities or Energy Stocks. Suddenly stocks are waking up to the facts that: 1) natural gas was off 40+% and oil was all but flat last year, 2) oil and gas inventories are high, and 3) that the energy stocks that sell these commodities for which there is currently less demand are seeing their earnings estimates begin to tumble. If only someone had told the bulls that a little earlier so we wouldn’t have had to suffer through the non-sensical (but very painful) rally of October and November! Wow, Lehman even downgraded XOM this morning!

Oil Bulls Got More Bad News In The Form of Rising Products Inventories:

  • Crude inventories fell 1.3 mm bls for the week, well off the pace seen in the prior two weeks which labored under a fog shuttered Houston Ship Channel. Though still a decline, the draw in crude was spun positively on CNBC by a guest oil expert. Not to belabor a point but his firm had called for surprisingly low crude draws in the prior two weeks and was looking for a build this week. Let’s just say that I think his motives are suspect. The “bullish” crude draw was quickly overshadowed by…
  • …Much larger than expected builds in both gasoline (5.6 mm bls) and distillates (2 mm bls-double expectations). CNBC’s guest shrugged this off as a lack of winter weather. Fine. In that case I’ll shrug off the two previous large crude draws he said had shown that the market is coming back into equilibrium as nothing more than a logistical glitch. And wait a minute…warm weather reduces gasoline demand? I don’t see that.

Note how quickly gasoline and heating oil inventories have pulled back to above average levels for this time of year. You can say it’s the weather but then there’s that pesky gasoline chart. Hmmm. Could it be that since the refiners decided to go back to work we’re catching up? I wonder.


  • Refinery Utilization had been low for an unusually long “maintenance season” but is now at 91% and rising. Margins are down and surprise, COP warned that margins are well below third quarter levels.

Oil Got Popped Again…Oil was off $1.50 before inventories but settled down $2.73 (for the second consecutive day) to $55.59. $55 is the obvious next test and although I really expect Opec to make a statement very soon so far they have been quiet. Maybe rebels or somebody else can help the bulls because it gets kind of hard to find support at this point. In fact, the February contract hasn’t had a weekly close below $55 since June 2005! Crude reversed slight gains overnight and is trading down to $55.25 this morning.

… And The Stocks Took It In The Shorts. The XOI, XNG, and OIH all made good progress toward the levels I wrote about yesterday morning.

  • XOI fell 1.9% to 1,128 and is now resting just below its 200 dma. Any move to the downside could result in an 1,100 test at which point, you could see a 80 point freefall to the September lows. This fall would seem to make sense when you recall that oil was nearly $10 per barrel higher in September than it is now.
  • XNG fell 1% but natural gas was flat on the day. At 427 the index has to fall to 390 to reach it’s late September lows. Gas is hovering just above $6 now but in late September, natural gas traded at $7.70, once again auguring for lower levels on the index, especially in light of the downward direction I believe gas is headed in.
  • Oil Service Got Slapped Again. The OIH fell another 2.5% to end the day at 130 but looks at a minimum to be headed back to its September lows of around 120. Below that and you’re into the fall of 2005 before you find any solid technical support. Quite simply, if commodity prices continue to decline, oil and gas companies will not be able to pay for oil services (less fraccing, less mud, less drill bits, less drilling etc) at present pricing let alone suffer the increases that they have been for the last four years.

Note To Readers. I realize that I’m talking about technical levels of support a lot recently but that’s because of the nature of a good portion of the dollars invested in the energy complex. There is an awful lot of funny or go-go momentum money in the group right now and those people rely primarily on charts. They don’t care so much about the company as about the stock. I feel it’s a pretty important distinction. Anyway, they act as a herd and when a group tires they move on. Fast. I think Art Hogan, market strategist at Jefferies and Co., summed it up best by saying, “It looks like technology is going to be the leader of this market in the first quarter. Even as energy is falling, money is going straight out of there and going into techs.”

Odds and Ends:

What Did T. Boone Pickens Last Say About The Price Of Oil? According to T Boone oil will average $70 per barrel in 2007. Did CNBC lose his phone number? Or is he a bear now but still accumulating his short position? He can just say he would have been right but he didn’t buy into the whole global warming thing. By the way, the Brits said yesterday that 2007 is likely to be the warmest year on record due to El Nino combined with global warming. Maybe Opec should see if they can convert some of their oil to sunscreen. Don’t get me wrong. T Boone is a legend and great philanthropist.

But How Much Does He Really Think Oil Is Worth? His company XCO just bought an asset package from APC last week paying the equivalent of just under $15 / barrel on a proved reserves basis. Yes they’re still in the ground but theirs also the probables which were probably sizable and the rest of the untouched acreage. Hmmmm. It’s always easier to drill for oil on Wall Street but how big of a spread does he think there should be? In fact, according to a writer at the Washington Post, Bloomberg ran a story (which I admit I haven’t found) about how Picken’s hedge fund made money shorting oil in the fourth quarter after repeatedly going on CNBC and touting higher oil prices (which I vividly remember).

Gas Inventory Day: Gas Withdrawal Should Be Up Slightly Over Prior Week But We’ll End The Year With Over 3.0 Tcf In Storage- A Record. Last week saw 165 heating degree days recorded vs 156 in the prior week. The distribution looks a little better for gas consumption. I’m guesstimating 70 Bcf and I haven’t seen a consensus number yet. Honestly, gas should be toast unless the number is just absurdly large.

  • We’d have to have a withdrawal of 132 Bcf (which is NOT going to happen- not even close) to save you from the headline. “Gas In Storage Ends Year At ALL Time Record Level”. We’ll probably get something between 60-100 which doesn’t even get you below 3 TCF.
  • Gas has been coasting for a few days now but should angle to the downside next week (or today if we get a number below 50).
  • This week’s HDD number for next week’s withdrawal falls back to 157. This mild weather is simply not supportive of gas over $6 in January.

Analyst Watch: Lehman cuts XOM from Buy to Hold over slowing production growth. Prudential cut EOG and CHK to neutral while UBS raised EOG to neutral.

SU Had A Strong December. 281,000 bopd oil sand production, up from 257,000 in November. This brings their 2006 average to nearly 260,000 bopd which is at the high end of their stated range. The company also said to expect average oil sands production of 260-270,000 bopd for 2007, in line with prior thinking. After the beating this stock has taken it will be interesting to see if a piece of unexpectedly good production information can rule of the pall of lower oil prices.

Thanks for reading everyone! I’ll be around all day but as always, have a great weekend. I’ll be adding a valuation table tab this weekend so when I say something looks cheap or expensive to me relative to its group or to its own history you’ll see what I mean graphically.

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