zman’s Energy Brain

oil, gas, stocks, etc…

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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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    18 Responses to “Wednesday – It’s All About The O. HO That Is!”

    1. El Diablo said

      I have to point out the OVERWHELMING LACK of dire weather predictions in the past week. The prediction for the current cold weather was BLASTED all over the media mid-january. Now that cold weather is passing. Where are the current predictions DTN METEORLOGIX?!! Never heard of them before that now-famous hatchet job. What does their current 10-day forecast say? Its conspicuous absence answers my question.

    2. nltd said

      Z

      What’s your take on DVN earnings and market reaction?

      N

    3. zmann said

      El D – good point. It’s amazing how this guys pull a disappearing act when it’s convenient for them

      N- DVN – This earings season all is forgiven if you don’t miss or reduce production guidance. Of course, the stocks are getting more expensive if they don’t move at all (as forward earings are down) but the Street just won’t give in on them, especially the big caps. On the flip side, it’s not rallying yet and the conf call should be fairly important/revealing on ’07 growth.

    4. nltd said

      Thanks Z

      N

    5. El Diablo said

      I agreee with you on draws this week and next (for weather that is largely over now). Market should already have this priced in; future expectations are needed to drive market higher. If there was a 10-day forecast (from anyone) predicting persistently colder-than-normal temps across the country, I’m CERTAIN that it would have appeared by now. The size of these draws is the last unkown for the energy bulls, at that will be over soon enough.

      And one further point on the draws. One cannot OVERLY discount the lumpiness of draws. It will certainly be tempting to predict doom and gloom when a (single) large number appears. Do not fall into this statistically erroneous trap. Example: Since winter has been mild before last two week, if you believe most oil-heating customers begin the winter with a full tank of oil, there could come a time when ‘more than normal’ hit their refill point, and it ‘could’ occur on or before a very cold week. A purely logical explanation for a bigger than expected draw, yet says nothing about the overall state of the market.

    6. zmann said

      400,000 crude draw – could be the refinery utilization
      2+ mm bls gasoline build…not good for the refiners
      3.7 mm bls distillate draw – bigger than expected (mini monster)

      I’m going to watch oil and the stocks which have already reversed direction twice in 6 minutes.

      I’ll be taking TSO and VLO puts now.

    7. tom2oc said

      Hey hi Z, curious to have your take on COG. Whenever oil turns south (if it ever) after crossing your 60 line, I’m thinking on jumping on that one on that nice looking possible double top. Thanks.

    8. zmann said

      Tom2oc,

      Long time no see. Great pick! They kind of fell off my radar screen and they’re mostly gassy but who deserves that kind of perfomance in this environment? From a FA standpoint I’ll need to do some work on their hedges and production profile but they’ve definitely come too far too fast. Thanks.

      FYI, your services are needed here and at Phil’s site.

    9. tom2oc said

      Z, nice to see the FA is in accord with the TA on this extended stock. I’ll load a TA on my new blog (just fooling around while this market is in the range) to show you what I see on it. Check a little later. Same address.

      Great blog! I’ve been reading your site regularly although I didn’t trade the oil for ages but getting ready more than ever for the U-turn you’re anticipating.

      Cheers

    10. tom2oc said

      COG TA loaded. Will wait to see what you find out on the FA side. Thanks.

    11. zmann said

      Tom2oc – drop your blog address here so everyone can see it please.

    12. zmann said

      From Phil’s site: my response to a question on PTSG

      Fred…I don’t do targets but I think the potential is big enough you could get a near term spike over $1.50 (we’re up 17% today at $1.30.)

      I have it from the head of a large, private, Tx based E&P company that the play is along a right of way only XOM has through the shale via an old abandoned pipeline. Leases by others in the area won’t be drilled as there is no way for the gas to get to market without using XOM’s pipe which won’t be allowed. Those leases will expire and Exxon plans to scoop them up on the cheap. This play could ultimately involve 100,000 acres of prime Barnett Shale real estate.

      PTSG has a little over 5%. The company is only valued at $40 million right now and gas reserves stood at less than 2 Bcf at year end last year. A decent well in the Barnett is 2 Bcf ish so say at 5% you’re looking at doubling PTSG gas reserves with every 40 wells XOM drills. Say they drill on 80 acre spacing which is actually extremely conservative, you’re lokking at over 1,200 wells. No exploration risk. Just drill and watch them flow.

    13. tom2oc said

      Z, just click on my name to get there. Blog might end if the market breaks out over 2500 though because I’ll be busy as hell trading the long side. We’re getting closer but it ain’t done until it’s done.

      http://tom2oc.blogspot.com/

    14. zmann said

      OIH stuck in the mud at 138. Looks lower to me from here. Danger is the DO report tomorrow could spark at least a brief rally if they beat which they usually do (although not last quarter).

      USO just fell off a cliff and XOM is finally following. I’m very close to doubling the BHI puts as a cheaper surrogate to a play against the OIH/OSX.

    15. zmann said

      Second set of VLO puts at $0.35. This doubles the ones taken the other day $0.70.

      TSO MAR 80 puts added at $1.80.

      BHI bidding second lot MAR 67.50s @ $1.45.

    16. zmann said

      COP on the Venezuelan production delay deserves a putter here as well. This is the American version of BP, the other gang that couldn’t shoot straight. If weather is partly to blame here for oil falling than it’ll hit nat gas hard after the big run up and this is the most gas centric of the majors.

    17. […] For more insights into my stocks picks see Wendesday’s edition here. […]

    18. me 4you said

      book review of the zapatista reader edited by tom hayden

      This is another cool post, useful informations.I say that because I’m visiting your site every weekend.
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