zman’s Energy Brain

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Archive for February 7th, 2007

Wednesday – It’s All About The O. HO That Is!

Posted by zmann on February 7, 2007

Oil: To Fall Or Not To Fall? Oil rallied again at the open and briefly touched $59.99 before quickly succumbing to profit taking to close up a whopping $0.14 at $58.88. In fact, it would have been down on the day but was saved by a last minute rally. Today the size of the distillate draw will determine if “the third time is a charm” or it’s “three strikes and you’re out.”

Here’s the range of oil inventory estimates from a variety of surveys:

  • Crude – UP 1.0 – million barrels. No one really cares about this number now unless it significantly misses the mark in either direction.
  • Gasoline – UP 1.35 million barrels. Ditto the comment above on crude. See Note #1 below.
  • Distillates – DOWN 2.6 to 3.3 million barrels. CNBC will go with the low end which is from Dow Jones this week. The high is from PVM Associates who’re generally pretty good at predicting the weeklies. The simple math says the following:
    • Solely based on the degree days which were actually a hair lower than those of the prior week we’d get a lower number than last week’s 2.6 mm bls,
    • Refinery capacity is expected to be up a little (0.2%) so that adds back some heating oil while consuming a little crude,
    • But those secondary and tertiary stockpiles are getting pretty beat up by all the cold so you’ve had some refills already which could lead to a slightly bigger draw this week.
  • We Could Easily Get A MUCH BIGGER NUMBER Today. I can’t stress enough holding off on trades pre inventories. February is a very volatile month for heating oil and especially so in a winter season that didn’t see it’s first prolonged cold snap until January…like this year. A similar pattern occurred in 2003 and when the cold set in (a bit colder than we’ve seen of late to be sure but similar in both it’s timing and longevity) withdrawals quickly grew to as much as 10 mm bls per week even as the northeast started to defrost. Since I’m primarily short I hope I’m wrong. However, since I’m only a fifth scaled in I’ll also be happily take cheaper puts at higher stock prices.

    2003-ho-draw-down-example.JPG

    Today’s Go List: This is a list of candidates for PUTS if we get a distillate withdrawal of 2.7 million barrels or less. I’ve been pretty patient since crude bottomed in mid January and subsequently rallied $10. These positions, if activated will represent my second 20% (second toe) as I scale into my Spring put positions.

    Note: Call positions (for a quick trade) will be taken where indicated if the distillate draw is a monster (3.3+ mmbls) or crude stocks fall (unlikely but possible) or gasoline supplies decline (not in this universe fella).

    And If  Distillate Inventories Fall In The Middle My Range I Sit On My Hands And Watch The Direction Of Crude For A While. If the crude and gasoline numbers come in pretty much as expected and heating oil falls in the middle of the range the following trades, for the most part, get put on hold. There’s no reason to try and be a hero here.

    • BHI instead of the OSX or OIH puts, great correlation and it’s had a good bounce, and the premiums aren’t nearly as rich!
    • APA – a laggard that’ll really get hurt when oil turns. However, CALLS on a crude rally,
    • EOG – because their growth is largely from Trinidad where gas is still pretty cheap and they’re expensive. For some reason, despite being a very gassy large cap E&P, these guys are much more highly correlated with oil prices.
    • PTR and PBR. Take you’re pick since both suffer quite nicely if oil retrenches, but I prefer PTR‘s slow growth and China market syndrome potential to PBR’s ability to slap a short with massive exploration success at any moment.
    • BP their self sabotaging nature really hurts the bottom line. As a laggard, they’ll get hurt worse than their peers if crude quickly retreats.
    • SU not a big move up with oil after the BP takeout rumor dissipated, will fall with oil though. CALLS on a rally. Good for a two point pop on the call side should we get a big heating oil number that drives crude well beyond $60.
    • TSO – it just doesn’t get any better than the quarter they just had. Also, after the bludgeoning yesterday this one would make an excellent day trade for CALLS on a rally.
    • XLE and/or XOM – puts or calls depending on circumstance.

    Note #1: if gasoline stocks were to fall (inconceivable I grant you but if) then I’ll be scooping up nearest strike, OTM, front month CALLS on TSO, VLO, and/or SUN. These won’t be held any longer than it takes oil to jump from $60 to $65 on a gasoline draw. Again, Inconceivable!

    Note #2: Those of you that read my daily posts will note I left out a few of my favorite put candidates. Among those absent from the list above are HAL, SLB, HES, and MUR. The reasoning is simple. They are generally resilient and I’ll have more time to watch and confirm that they are actually going to respond.

    • In HAL‘s case, it’s viewed as too cheap to short and it is true that gas will help support it up here (as long as gas holds up).
    • SLB is the Mercedes of the group and has the multiple to match. It acts like XOM does for the majors – a safe haven when most energy screens are red plus it is a high quality name and I just get antsy about shorting any name with so much cache when Goldman is banging the “buy energy at all costs” drum on a weekly basis. I do have a small put position here now.
    • HES. Who am I to pick a top? It’s not overly expensive and the only thing I really begrudge them is that they don’t react to falling oil since everyone is so happy over the retirement of their once lousy oil hedges. Got a toehold here as well.
    • MUR. What can I say except expensive, disappointing on the guidance side and zero expectations from the street. This puts you in constant danger of an upgrade.

    Natural Gas Will Follow Heating Oil Today Because This Market Is Extremely Black & White Right Now. Odds are that natural gas will look to the size of the heating oil draw as if it for-tells the size of the gas pull tomorrow. I don’t care what heating oil does today, tomorrow’s natural gas inventory report should show the largest withdrawal of the season, bar none. I have more detail on it tomorrow but suffice it to say for now that gas weighted heating degree days shot the moon while heating oil HDDs backed off a bit.

    Odds & Ends

    Opec Watch:  Russian oil minister says “Gas Opec product of a sick imagination.” Dude, watch out how you talk about your boss!

    Earnings Watch:

    NFX – Expected $0.97 EPS and $530 mm revenue later today. Stock’s been overly beat up of late.

    Analyst Watch: NOV from add to buy at Calyon, NOV price target cut at RBC. ACI price target trimmed at RBC, GRP price target boosted at Calyon.  BP downgraded to hold at ABN Amro.

    PTSG To Present At IPAA OGIS Tomorrow. This is that tiny participant in XOM‘s Barnett play. Worth watching the webscast.

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