zman’s Energy Brain

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Thursday – Gas Forecast & Oil Review

Posted by zmann on February 1, 2007

Dear Reader,

I’ve added snap to my site. That’s not a commentary on my writing but the service snap which allows you to hover your cursor over hyperlinks to get a quick 2″X2″ callout preview without actually clicking through. If you’re like me and don’t like squinting at a tiny chart of oil you’ll just click on through but now you have the option to briefly check out the link. Let me know if it’s useful or annoying. Thanks.

Natural Gas. Gas didn’t rally with “surprise draw in distillates” ( see oil discussion below) yesterday morning and it failed to rally with the Fed’s rate inaction yesterday afternoon. I guess 10% in one week is enough. Anything less than 200 Bcf today tanks it…at least for a couple of hours. Then less cooler heads will probably prevail. I’m staying away from additional gas based shorts until traders start to wake up and smell, well, all the gas.

  • My Estimates: 200 Bcf this week, 210 next week. Despite the slight drop in degree days I’m expecting a bigger withdrawal from storage today…

hdd-vs-demand-013107aaa.JPG

  • Because the degree days were in all the right places to foster sizable demand.

gas-demand-regiional-breakout.JPG

  • Consensus Expectation: I think around 200 Bcf.

As you can see, the cold has forced me to up my January estimates:

gas-table-013107.JPG

  • January Average Gas Withdrawal: 563 Bcf so we’re going to bust that.

But even after all this cold gas storage remains within 20 Bcf (0.8%!!!) of record highs. Traders may rally gas for a time but it dies a week before the frost melts (basically when the first warming trend is forecast which will probably occur in the first or second week of February).

Oil Reversed Course After What Appeared To Be Bearish Numbers Were Reported. After starting day off in the red, oil sold off on the inventory report, rallied five minutes later, traded sideways through a long lunch, started to sell back off and even went negative again and then soared when the Fed decided to do nothing. Bloomberg said it best with,“Oil jumped almost $1 in 15 minutes after the U.S. Federal Reserve cited firmer economic growth in six-weekly review of interest rates. Oil jumped 7.6 percent in the past two sessions, the biggest two-day increase since December 14 and 15, 2004 when gains were spurred by below-normal temperatures and falling stockpiles. Ah…of course distillate stockpiles are the only ones falling and this is the first time in 6 weeks but what the hell…buy, Buy, BUY!

Yesterday regarding inventories I wrote the following (in italics).

Consensus estimates for today’s inventory report are:

  • Crude: Up 1.2 mm barrels. Actual number: UP 2.7. More than 2x expectations.
  • Gasoline: Up 1.6 mm barrels. I wouldn’t be surprised to see a noticeably bigger build here. Actual number: UP 3.8 mm bls!!! Also a more than 2x beat…talk about noticeably bigger!
  • Distillate: Down 2.6 mm barrels. This would be the first drawdown in inventories in the last 6 weeks but it would leave inventories ABOVE the upper end of the historic inventory band for this time of year. Distillate down 2.6 mm bls. For what’s it worth CNBC (Can Not Bash Crude, ) reported this was a bearish number since expectations were for a 2 mm bls draw. Hmmm … I guess that would be the case if you take the number from one of the guys standing in the pit around you and not from the Dow Jones survey I use! Bloomberg was apparently looking for a draw of only 2.1 mm bls but I think they include an outlier that DJ doesn’t bother to call anymore.
  • Refinery Utilization: Down 0.1% to 87.3%. Down 0.3% to 87.1%. Our own grass roots Cartel hard at work (well, actually not working that hard) getting ready for the driving season.


And the reaction to all of this was a BULLISH one. Traders are hell bent to test $60 oil.

Energy Player Quote Watch:

“The last two weeks we had the same pattern, we closed higher even though the numbers were bearish,” said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. “The psychology of the market has changed. Any dip is seen as an opportunity to buy.”

“The heating season is effectively over,” said Eugene X. Hodge, a managing director at John Hancock Financial Services Inc. in Boston, who manages a $4.3 billion oil and gas company bond portfolio. “Attention is shifting to gasoline and the driving season a few months ahead.”

Crude inventories are now 10% above the 5 year average as we head into the seasonally slow demand period that is Spring. It does make one wonder whether the weather and Opec “cuts” will lend staying power to crude.

wti-vs-inventories.JPGLet me just say now that I’m not predicting $20 oil. Please don’t sell your gas station if you own one before talking with your financial adviser. Please don’t get that second mortgage to buy puts on Exxon either. I’m just saying that I don’t think the V shaped recovery crude is enjoying will last past $60 nor hold that level. If the days of supply chart for crude didn’t mirror that inventories chart I wouldn’t even bring it up. And things are different now. You’ve had inflation. You’ve got a terror premium. You’ve had demand growth.  You’ve got hedge funds long massive positions in commodities. You have over a billion Chinese who dream of per capita oil consumption just 1/10th that of the average soccer mom. I understand all that. I’m just saying I don’t think the move has legs.

Gasoline demand for this time of year actually looks pretty healthy. Here’s one for the bulls. We may have high inventories but we also have high demand. Gas prices have fallen and the consumer has responded with increased demand: implied gas demand is up 2.3% YoY. Of course gasoline prices are down 8% versus a year ago but I can’t really rain on this parade.

As Hodge at Hancock said above, “the heating season is effectively over” and distillates remain well stocked. 

distallate-013107.JPG

Odds & Ends:

HES Receives Warm Reception On Luke Warm Results/Guidance. The stock tried and did pullback several times during the day but couldn’t dodge the euphoria of the Fed’s decision to do nothing and the stronger than expected 4Q GDP numbers. I covered most of the numbers in yesterday’s column but I’d reiterate that these guys are expecting a 4% boost in production levels and a 20-30% boost in cash costs. And everyone sees that as normal. I’ll watch and wait a little longer (maybe as long as 2 weeks before acting) but either the service guys are going to have another banner year or energy producer earnings are going to retrench a bit.

EEE Investors Grow Tired of “detail-less” PRs. Apparently the market agreed with me this morning. In comments I commented on their PR having no teeth. The stock was up 4% on the open and closed down 12%. Less testing more selling should management’s new mantra. In this case they weren’t testing the product but their “coal refinery” concept. Either way, it seems that everyone wants to see results. Someone obviously knew something was coming out as the stock repeated the pattern of past instances where it ran up prior to a “PR just around the corner” only to have the hopes and dollars of new entrants crushed back to reality. To be honest, I really like the new management team. They are class act and if anyone has the skillset to get clean coal burned everywhere it’s them.

Nigeria Watch: The heart of the problem in Nigeria is graft. The good news is that the next president isn’t known for that and is far (on the northern border of Nigeria in Katsina state) from the region (the delta) that is. Excellent article on the graft issue from Reuters.

From Stockpicker: A list of service stocks within the OIH ranked from most to least correlation with crude.

I have more on today’s earingings in comments.

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12 Responses to “Thursday – Gas Forecast & Oil Review”

  1. zmann said

    XOM, VLO, MRO beat

    VLO says refining margins remain strong in 1Q

    APA, EOG , PDC all missed by a few cents. These will depend more on guidance.

    XOM had 12% lower E&P income, 18% lower refining income, and 49% higher chemicals income. Taxes fell 24% which along with lower shares explains the beat. I only had one analyst estimate of revenue of $100B for 4Q which they missed by $10B

    That’s the quick more later

  2. zmann said

    EOG – Sorry, adjusted EPS a $0.04 beat, not miss.

  3. zmann said

    This should have been in the column this morning but I ran long but there’s a story out about BP spending more in the San Juan Basin to really milk gas production there.

    I can’t see how this is a bad thing for SJT, the local royalty trust. Even with falling prices they will eventually benefit from the higher production as they have a piece of those wells. Probably not worth an immediate pop but it will boost dividends over time to partially offset the coming decline in natural gas prices.

  4. zmann said

    My little Carbo Ceramics CRR reports big beat and jumps 15%. This is the ceramic sand maker (used to fracture well) and I tell you there estimates are still too low.

    With options always sell the initial reaction to news on a 5% or greater move in the underlying. This is $5+ on mid $30 stock.

    XOM tax rate not helping the stock – you’d think they’d have been up on that earnings beat.

  5. Attacking Mid said

    Talk about blatant tape painting. Take a look at BQI’s chart yesterday. Stock was languishing in the $4.80’s all day, then BAM!…. closes at $5.17. It’s back around $4.90 this morning.

    I gave the HES puts a whirl, but seeing VLO’s results made me a bit worried this morning. So far, it’s not spilling over to HES.

    SU’s been weak as of late – ever since the rumor died down regarding interest from BP. Makes it a poorer trading vehicle.

    Is EOG ready to be shorted again? It’s up a lot in recent days.

    AM.

  6. zmann said

    AM

    BQI has been very volatile of late. Still thinking about it

    EOG – I’m waiting through the conference call to add if at all.

    Those two big gas draws are all traders can think about right now.

    XOM’s tax rate is haunting the stock right now.

    CRR is up 18%! – can’t believe I never bought it.

    Oil looks like it’s just gotta see $60 before really pulling back (or moving higher). Inventories look really strong for this time of year and I think we’ll be looking at bigger worldwide surpluses later this year even at current reduce Opec porduction levels.

  7. walter said

    I’m thinking about VLO calls, the numbers look good so far.

  8. zmann said

    186 Bcf – that’s pretty small. Funny to see USO sell off hard on the news!

  9. It is funny looking at that inventory to price chart, 05-06 as inventories increased the price increased too.
    Makes little sense to me. Even with all there little premiums and technicals, I would expect prices to still pull back even if it was abit slower d/t premiums.

    -SaneO

  10. wow 186

    -SaneO

  11. Attacking Mid said

    Guess I shoulda taken those EOG puts this morning. On my entire trading screen there is one gassy stock green…. ECA. Happens to be the only one on which I hold puts. I’d laugh if it weren’t for that large loss number in that row.

    AM.

  12. zmann said

    I see nothing in today’s numbers that would cause the street to reverse course on the group.

    Refiners are beating estimates with VLO heading up,

    service guys say there’s no problem and no slow down yet if ever,

    XOM managed a beat but only by way of a lower tax rate and no one cares

    I see no reason to add to puts on this strength with cold hanging on longer than originally anticipated. I saving my bullets for higher levels.

    It’ll be up to falling commodity prices to take the stocks down and that could take a while. Gas almost certainly gets a bigger pull next week which is limiting the downside to today’s miss.

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