zman’s Energy Brain

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TGIF – Elk Hills Rally Overdone

Posted by zmann on February 8, 2007

No picks today – too much gaming going on with oil and gas prices.

Oil Rallied Hard On Elk Hills Fire. Oil was treading water yesterday until OXY announced that its Elk Hills field in California had a fire on Tuesday and that 95% of the field’s 120,000 boepd capacity would be shut in indefinitely (the field is 60% oil so this is only 72,ooo bopd) See table below. Crude rallied two dollars even or 3.5% on the news to close at $59.71. Interesting that buyers ran out of steam before they breached $60 but in electronic trading they have now shot through $60.40. I still think it’ll bounce off $60 in the regular NYMEX session and head lower again but only if OXY provides further details on a recovery schedule and if the Nigerian oil worker unions don’t re-threaten to strike.

elk-hills-on-fire.JPG

Why yesterday’s move in oil was a bit overzealous:

elk-hills-c.JPG

Even If It Is An Over Reaction The Rally May Continue Due To Short Covering And Technical Reasons. So we got a 3.5% rally in crude off a 0.45% disruption in U.S. total crude supply. If we hold demand and supplies flat from here it would take 58 weeks to eat through the current surplus over the five year average crude inventory level. However, a word of caution would be that a month of this outage would take you into deficit versus year ago inventory levels. Traders have been looking for oil to close over $60 and if it manages that tomorrow all sights will be fixed on the next juicy round number: $65. It’s bunk but that’s the way the barrel rolls.

This is very similar to the rally we got last August when BP announced it’s little rust problem at Prudhoe Bay. That rally was short lived despite the fact that a lot more produciton was affected. Prices ended up tumbling when the company released details on when the pipeline would be rerouted. Although this market is a little tighter thanks to Opec, I’d expect the same reaction here when OXY begins releasing time estimates.

He’s Got A Ticket To Ride, And He Don’t Care. Goldman Sets $69 Oil Price Target For 2007. From Bloomberg:

New York oil futures may rise as high as $71.50 a barrel this year and average 4 percent higher than in 2006 because producer investment is “significantly” short of requirements, according to Goldman Sachs Group Inc. The price of the benchmark U.S. crude, called West Texas Intermediate, may average $69 this year, an increase from $66.25 in 2006, Goldman economist James Gutman said at a conference in Hong Kong today.

My Comments:

  • Which producers would that be? The FSU is growing, China is spending cash all over Africa to make sure it grows, XOM is actually going to grow this year, etc.
  • OPEC has 3-4 mm bopd of spare capacity now.
  • True, capital budgets are mixed this year but oil sand s production will be rising as will West African volumes.
  • Even the long standing decline of US crude production has actually flattened and turned up over the last year.

U.S Crude Production – The Long Slide Appears To Have Stalled.
us-crude-production-graphs.JPG

  • I remember when analysts used to employ price decks that were below current levels. It’s conservative and let’s the user of their analysis judge the company based on the fundamental business, you know, production, costs, cash flow. Conservatism has gone out the window and, I might add, room for upside to GS’ estimates.
  • days-supply-crude.JPG

Not only are we near an all time high for crude inventories but we’re very near the high for this decade on days of supply (which takes into account demand). OECD inventories are near highs as well and the China/India per capita oil consumption growth card is not playing out as well as many in the industry portray.

    Natural Gas Review: Withdrawal: 224 Bcf. My estimate 230. Street 216.

    Gas actually backed off on the news since the report was roughly in line with estimates. While the next report will almost certainly be smaller I urge caution in the coming week for when considering adding to put positions. Also, traders are commenting about the large amount of selling that arrives every time gas makes any positive headway over the last several days. They surmise that if gas can break through the $8 ceiling that a wave of short covering would likely ensue driving prices significantly higher.

    Close Enough For Hand Grenades (Closer Than The Street).

    gas-sto-revu-020807.JPG

    Gas Inventories Are Still 19% Above The Five Year Average

    gas-storage-020807.JPG

    We’re Still On Track To End Storage North Of 1.5 Tcf! If you take the coldest 8 week period (late January to the end of March) over the last 14 years you get demand of 832 Bcf which would still leave 1,515 Bcf in storage. That’s well above the 5 yr average trough level storage (end of March) of 1,025 Bcf (excluding 2006’s warm and Katrina impacted levels). For more on my thoughts on the natural gas storage data click here.

    Odds & Ends:

    Oil Sands Watch: – FBR is voicing concerns over oil prices and their impact on oil sand economics. Wow, a voice of reason amongst all the perma bulls. Stocks impacted: CNQ BQI, SU, and ECA.

    Hugo Watch: I once said Chavez’ management of Venezuela was a textbook example of how not to run an oil country based on this chart and his various statements and activities. vz-vs-opec.JPG

    I’d like to revise that simply to “how not to run a country” since now there’s no meat or sugar in the grocery stores. When are the people there going to get tired of the blatant mismanagement of their country and toss this guy? Where’s the beef Hugo?

    For more insights into my stocks picks see Wendesday’s edition here.

    As Always, Thanks For Reading and Have A Great Weekend!

    .

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    21 Responses to “TGIF – Elk Hills Rally Overdone”

    1. zmann said

      NFX – FBR cuts price target from $62 to $55 while maintaining rating Outperform. The stocks is at $41 now. That’s it for the Street response. Complacency reigns.

    2. JJ said

      ZMan —

      This is a follow-up to an earlier question about a 5-year chart that I once had bookmarked that showed Natural Gas consumption. It was free and did not require that I register.

      Did you ever have a chance to look for it?

      JJ

    3. zmann said

      JJ – I looked and I failed. Do remember if the it was on the homepage of a gas distribution company? I kinda sorta remember the chart. It was ugly. Did it show weekly gas consumption estimate vs HDDs?

    4. Attacking Mid said

      BQI has been suffering from expiration of restrictions on about 14MM shares. I’ve been watching the relentless selling, which has caused the SP to march steadily downward. It appears we may be nearing the end of the deluge, and I’m anticipating some solid gains next week. Management is committed to updating drilling progress mid-month, and I expect we’ll hear something toward the end of next week.

      There are a couple of ways to play this: buy the shares (today might be a good time) and hold on for about 9-12 months, or you can swing trade like I’ve been doing for the past year or so. Right now I’m doing options, but with the SP being $0.60 below the $5 strike, they’re not quite as attractive. I’m in some March $5 calls, but mostly in Aprils. Got very lucky a few days ago and was able to roll out of my Febs at a small loss.

      I also believe this stock is a great candidate to tuck away in your long term (e.g., retirement) funds and just hold it. Most likely this company will be taken over within 2-3 years, and there’s a good chance of significant gains from here. In fairness, there’s also the chance for total bust if the bitumen proves less abundant than expected.

      I don’t think today’s oil prices are having much effect on BQI due to the forward-looking nature of the stock. The oil they’re finding up there today will not be produced and sold for several years. Few think we’re going to be swimming in $35 oil in the next decade. Also, Petrobank (PBG.TO) is developing new oilsands technology that looks promising (another interesting oilsands stock that is much further along the timeline than BQI). You can bet that as more and more reserves are discovered, technology will evolve to make the oilsands increasingly efficient.

      AM.

    5. Oil Pro said

      Z,

      huge call action on the XLE……..March calls. Any guesses as to the Oil action continuing in to the positive over the next week or so……or think it will start turning south by end of next week

    6. Oil Pro said

      Z,

      Any thoughts on HOC and STO earnings ??

    7. JJ said

      ZMAN —

      The chart actually updates the same day the NG withdrawal numbers come out. Damn, I wish I had written down my bookmark.

    8. zmann said

      JJ – I update the same day too. What exactly are you looking for? Maybe I can help.

      ————————————————–

      Oil Pro – Question #1 – I think it all depends on technicals, not fundies right now. Clsoe over $60 we go higher at least early next week. Close below it goes either way. Later next week I expect a drop but the same rules apply to the heating oil pull. Could be even bigger despite the lower oil weighted HDDs.

      OP Question #2. HOC better blow their numbers out b/c they are way overpriced. Sorry, not up to date on STO, I’d just be guessing.

    9. zmann said

      AM – Welcome back! Thought you’d quit the game (or at least coming around here)

      Hear ya BQI. FBR down on the oil sands guys saying they doubt some of the activity will result in actual prodcution in a few years b/c they’re concerned that falling oil prices will kill some projects. I’m watching it and will get in when it bottoms but I’m not real long any of the smaller stuff right now. There seems to be a winnowing process taking place with the larger caps extending their gains over the small and mid names.

    10. Oil Pro said

      Z,

      Any opinions on HOC puts before earnings ……

    11. zmann said

      Can I get a show of hands of those who have signed up for email delivery? Also, I’ve got RSS feeds you can burn to get notice of the post on a daily basis.

    12. zmann said

      HOC put opinion. If you do anything don’t bet the ranch. Despite the multiple these guys are thin and the option spread is large so you can get burned. If I did it, which I’m not, I’d go out to at least march and NTM.

    13. I get email delivery

      -SaneO

    14. zmann said

      Gas rigs up 27. Count’s look toppy and will probably fall with gas in the Spring.

    15. nltd said

      Z

      Not currently signed up for email. Does it help you if we are? Would rather not as I’m not good at keeping up with mail, but willing if need be. . .

      Wow, right now crude losing struggle to maintain 60 for weekend. ..

      N

    16. Wow crude couldn’t pop 60 into the close.

      -SaneO

    17. zmann said

      That’s ok. The RSS feed is a pretty cool alternative actually.

      Doesn’t help me either way b/c I don’t charge for the site or advertise.

      Just got bakc up after an hour of no internet . Comcast is completely lame.

    18. Eric said

      Z, I read all my blogs via a RSS reader, however I go to Phil’s and your site directly to read the comments.

    19. zmann said

      Oil failed $60, gas failed $8. The stocks are largely where they were before oil rolled over…ones that were down then are down more and those that were up are still mostly up but less.

      It doesn’t get any better for demand than this and the equity traders know that. The futures guys will play musical chairs game and then all try to exit at once. Fist warm forecast and gas will get hit.

    20. zmann said

      OXY says it plans to restart Elk Hills within days.

    21. generic tadalafil us pharmacy

      news

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