zman’s Energy Brain

oil, gas, stocks, etc…

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Monday Morning – Patiently Waiting For $60 Oil, Forecast Still Very Bullish For Gas

Posted by zmann on February 5, 2007

Oil Needs To Hit $60 Before I Take Further Action.The March contract had another strong performance making considerable progress in its march towards $60 last week. The contract closed up $3.50 on the week to $59.02 despite continued large builds in crude and gasoline stocks reported Wednesday. True, there was a draw in heating oil stocks that was either in line or slightly bigger than expected depending on which survey you pay attention to (Dow Jones or Bloomberg) but this is the first pull from storage in 7 weeks in the dead of winter and inventories are still well above average so it’s hard to see the bull case based simply on that (though CNBC tried).

  • Heating oil weighted degree days show a slight decline to 282 versus the prior week’s 287 which should yield a slightly smaller pull from heating oil inventories unless the refiners decided to continue to reign in utilization.

No New Picks Until Oil Hits $60. I’d much rather miss out on the first 10% of a change in direction than try to pick a top or bottom. Phil of Philstockworld reminded me of my comments from January 17th: “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.” I should have listened to myself more closely because I only added a few calls at the time. Man what a ride it’s been since then:

perf-020307.JPG

The divergence between oil the energy stocks has started to crumble. Until the last couple of weeks oil had vastly underperformed the oily stocks of the XOI as depicted in the first graph below. The out-performance of the stocks can large be explained by:

  • Wall Street’s belief that any weakness in oil and gas prices was temporary at best.
  • Record buybacks led by XOM.
  • A generally rising equities market.

Recently, as oil took it’s almost mandatory bounce off $50 to its present level of $59 (up 14% in two weeks), the stocks managed to gain “only” 6% (see second graph below). This “divergence from the divergence” is not attributable to underperfmance from natural gas, which also scored double digit gains since the mid January commodity bottom, but is instead I believe, attributable to rising forward multiples and an increasingly pervasive sense that commodities have rallied too far too fast so oil and gas prices will head lower when this recent blast of cold weather abates.

xoi-vs-uso-020307.JPG

Organisation for Economic Co-operation and Development (OECD) Country Oil Inventories Have Been On An Inexorable March Higher. This list represents 30, primarily western, countries with large economies and trackable oil inventories. oecd-total-020307.JPGDemand for oil may be rising at 1-3% annually but these countries seem willing to put more and more oil into salt caverns and tankyards at higher and higher prices instead of actually consuming it.

For a regional breakdown of OECD storage regions see my new Oil Macro page. The data runs through September 2006 but with the much warmer than normal weather through year end in both Europe and the US you can bet that inventories rose through at least December in the OECD countries.

Winter weather hangs on in the East, Heartland. HDDs came in at 258 for last week, up from the early read of 238 HDDs on a gas weighted basis. That means that last week was by far the coldest of the season for the gas heated regions of the country. I really don’t see how we avoid a 200+ Bcf pull this Thursday unless something on the industrial side of demand is truly broken. The CPC’s forecast for this week is another quite blustery 254 HDDs. These are just the sort of forecasts to make one run out and buy calls on CHK, SWN, KWK for a one to two week pop and I am considering it.

weather-020307.JPG

These temperature forecast maps depict a slight change from ones over the last several weeks (there’s actually a splotch of red on them).

While colder than normal weather continues to grip the eastern 2/3rds of the country a warming trending is stalled in the west. Could this be the end of Winter? Probably not but it will serve to limit gas withdrawals from the western region, a maybe slightly from the producing region in coming weeks. Texas is expecting a return to 70 degree highs which is actually a return to normal for our little slice of heaven.

Since the western and producing regions have shown the biggest acceleration in withdrawals of late it would be better to see a return to more normal temperatures pushing further into the south before heading back for more puts.

Earnings I Care About This Week. Actually the list is pretty light after last week’s deluge. The lesson from last week is don’t miss. Even the ties did well but APA missed, got downgraded, and got creamed despite better than industry average projected growth. Next week the majority of mid and small caps step up to plate.

Monday: APC. Estimates: $1.26 eps; $2.73B revenues. Asset sales are running ahead of schedule. Production guidance should be down but the question remains as to how much lower it goes as the company pares back producing assets to reduce debt. Estimates are likely to fall a bit but nothing catastrophic. If they miss like Apache did last week it’ll make an easy decision for the analysts to downgrade the stock now and sort out the divestment related changes to the model later. However, it’s so cheap on a forward basis that it would have to be a significant miss to prompt analysts out of their current reiterate mode.

Wednesday: DVN, PXD

Thursday: NFX

Analyst Watch:BP upgraded to Buy at Goldman, SWN initiated as Buy at UBS, EPEX started at neutral at JP Morgan.

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14 Responses to “Monday Morning – Patiently Waiting For $60 Oil, Forecast Still Very Bullish For Gas”

  1. zmann said

    Gas storage: In this morning’s post I mentioned going long some calls based on the recent colder gas weighted temps. I want to reitereated these are very short term plays.

    Take a look here: https://zmann.wordpress.com/gas-storage/

    and note that the surplus versus the five year average remains in excess of 20% and we are more likely than not to end the withdrawal season with 1.5 Tcf in the ground unless the cold hangs on consistently through mid March.

    The short term bullish comes in when you look at last year’s very warm weather for last week which yielded a withdrawal of only 38 Bcf! Put that against a backdrop of 200+Bcf and you get why traders are bidding gas up to nearly $8 this morning.

  2. zmann said

    Algeria imposed “exceptional profits tax” on APC. New tax comes into effect when Brent > $30/barrel. 4Q charge for the Aug -Dec period is $100 million.

    Expect to see more of this kind of “recapture” if oil heads back down.

  3. neil said

    Never thought I would say this, but OIH is the preferred way to play energy over the next few weeks….As Z pointed out, the ratio of oil – energy stocks is almost nuetral now, and options on energy are VERY reasonably priced…I would buy SLB calls into April/May if you want a very god risk/reward pop, HAL seems to have pretty limited downside and has nice leverage to US gas prices if you want a play for the next week or 2

  4. Raj said

    Neil,

    Are you planning to go long on ‘OIH’ as well or just the selective stocks of the OIH?

    R

  5. neil said

    i am buying HAL..cheapest name and great leverage toNA gas…

  6. zmann said

    FYI, it’s make or break time technically on EEE. Looks like it’s about to head into new uncharted and lower territory. Have not seen when earnings are out but the Street is tired of promises and tests. Without real production of clean coal and sales this stock is $5.

  7. zmann said

    One other item. Oil almost hit $60 a few minutes ago, stocks barely getting off the ground other than a few that got upgraded this morning. Even an upgrade to buy by Goldman on BP is only prompting a 1/3 of a percent rally.

    On a day with oil up almost a buck and nat gas up another 5% equity traders are sitting on their hands? This looks like buyer’s exhaustion to me. Hard to get excited with few catalysts on the horizon.

    Everybody already knows it’s cold and while the cold will eat into the YoY gas storage surplus the commodity is acting like we’re already well into deficit. We may dip slightly into deficit over the next 3 weeks (easy storage comps) but not by much. We’re still on track to have 1.5Tcf in storage by the end of March vs five year average of 1.0 Tcf.

  8. Joe said

    1.0 Tcf? I show 5-yr avg low at 1.23 Tcf if you include 2006 in your 5-yr.

  9. zmann said

    Hey Joe, Good catch. I generally leave 2006 out since it was messed up on first the supply and later the demand side by Katrina/Rita but forgot to mention that today.

    5 yr with 2006 included: 1.22 Tcf
    5 yr w/o 2006: 1.03 Tcf
    14 yr with every year included: 1.1 Tcf

  10. zmann said

    Upgrades no longer really helping BP and EOG today.

    APC getting smacked in part over Algeria’s “exceptional profits tax” but also due I suspect due to worry over guidance from tonight’s confernece call.

    They punted another high potential deepwater asset late Friday and analysts should start, though there’s no guarantee they will, what this drive to bring down debt is going to cost in terms of long term reserve growth.

  11. zmann said

    Today’s post on yahooFinance with very bad formatting. Oh well.

    http://biz.yahoo.com/seekingalpha/070205/26069_id.html?.v=2

  12. zmann said

    Neil,

    Any HOC thoughts? I didn’t get a chance to listen to the call. The other refiners look to be rolling over. SUN really getting hit hard.

  13. neil said

    HOC..reports NEXT Monday..today was HEP, a subsidiary, who had decent results but not necessarily foreboding on HOC…stock is still very rich…i would be long VLO here and start looking to short TSO into strength..TSO had neg research report out today that they got the Shell refinery cheap only becuase there is a ton of environmental work to do and the stock market is buying off on synergies and company now needs to prove they can execute…

  14. zmann said

    Thanks for the update there Neil.

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