zman’s Energy Brain

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Thursday – Big Gas Draw Day But It Should Already Be Discounted

Posted by zmann on February 8, 2007

Oil…Third Strike And You’re Out! Oil was up $0.75 going into the inventory report and began a session long slide from there to close the day down $1.17 at $57.71. The drop may only be temporarily but this was not the big move through $61 many technicians were looking for to carry crude to $65.

In T. Boone parlance I’ll say that I think we’ll see $55 before we see $60. At that point Opec starts squawking again but I think once the cold subsides in the northeast we test $50 again. Yesterday, the National Weather Service predicted that below-normal temperatures will persist in most of the U.S. through 2/20 so I’ll have to be a little patient. As we approach that date traders will unwind an avalanche of recently acquired long positions as the simple fact that the US is amply supplied for the driving season and crude in general takes sway from the weather.

My quick review of yesterday’s oil numbers:

  • Crude – Expectation of a million barrel increase was met with a 400,000 barrel draw. The draw is explained by a combination of lower imports (9.547 mm bopd vs 9.967 mm bopd last week) and slightly higher refinery utilization. Crude inventories remain well above the five year average and the US market remains well supplied for current demand. Click on the chart below to get a better view.

crude-020807.JPG

  • Gasoline – Expectation of a 1.4 mm barrel increase. The number came in at almost twice that with a 2.6 mm bls increase. I took additional puts on VLO and a first tranche of puts on TSO in the wake of this number. Despite the fact that demand continues to creep up (we’re running 1.8% ahead of year ago levels this week) and that refineries have been conducting more maintenance than usual gasoline stocks continue to build quickly. This much gasoline in storage this time of year has got to weigh on prices soon.

gasoline-inv-020807.JPG

  • Distillates – Expectation: withdrawal of 2.6 to 3.3 million barrels. I said it could be much bigger and though it blew out the top end of the range with a 3.7mm bls draw it wasn’t the gargantuan number I was leary of. How the street arrived at smaller number than the preceding week can be explained by: 1) the fact that most analysts are leaving it to their research associates who do the simple degree day math, and 2) the fact that they want to low ball the number because sell ratings don’t generate trades (at least not as many as a coverage universe full of buys) let alone banking. In summary, Winter is nearing completion and there’s no shortage here.

Distillate stocks remain well above the 5 year average. Note in the chart at right that East Coast stocks remain at levels 50% greater than a year ago!

distillate-020807.JPG

Natural Gas Inventory Day.

It appears that $8 is the ceiling for the recent run in natural gas prices, much like $60 is turning into the top for crude. While I’m confident that today’s pull from gas storage will be the biggest of the season it will have to enormous (240+) to push gas above $8.

  • My Estimate: 230 Bcf. The producing and eastern regions saw the coldest weather of the season to date by far while the western gas region was only slightly warmer. Unlike last week, were the overall high degree day total misled analysts into overestimating demand, this week’s season high 258 HDDs will yield a season high withdrawal and the first breach of the 200 Bcf mark.

020307-hdd-vs-bcf-table.JPG

  • Street Consensus: ??? Bcf. Sorry no news stories published so far with estimates. I’ll have to get it from CNBC this morning.

Impact: anything over 230 Bcf and we may embark on a short lived rise over $8. The cold in January served to completely erode the YoY storage deficit and the transition between surplus and deficit has historically led to spiking gas prices. In this case gas is already up 18% in the last 3 weeks so most of the transition is already discounted into the price of gas. Last year March saw some late season sizable draws from storage so if they’re not repeated this year, our trip into YoY deficit status may be very brief…which should send gas back to $6 territory.

Next Week It’s Unlikely Withdrawals Top The 200 Bcf Mark. Traders at the NYMEX are no doubt preoccupied with the cold in the northeast but I’d point out to them that this week has seen a veritable heat wave through the core of the producing region with temps hitting the mid 70s across Texas and reaching temps 20 degrees above last week well into the nation’s mid section and South Atlantic regions. Next week’s HDD tallies, when they arrive on Monday are sure to fall from the early read of 254. You’ll know by looking at the March natural gas contract which will be down if I’m right in pre market trading Monday. At that point, analysts, who are probably drooling another over the prospect of 220+ Bcf withdrawal next week will be forced to curb their enthusiasm.

While it’s still pretty cool, the West and Producing Gas Regions are enjoying an extended respite from colder than normal temps.

weather-map-020807.JPG

Odds & Ends:

Nigeria Watch: After agreeing to meet with two oil unions that threatened to strike last week, a move that would virtually shut down Nigerian production, Nigerian president Obasanjo skipped a meeting with them saying he had other more pressing matters of state. Smart. Meanwhile a French oil worker was kidnapped yesterday which should set the unions back on the strike path PDQ.

PTSG Up 17% Yesterday As IPAA Attendance Announcement Is Announced. The key thing to remember here: Easy come, easy go. If I bought in at $0.90 when I originally mentioned this single digit midget on January 30th, I’d be very tempted to take the 41% gain and run for the nearest T-Bill, CD, mattress, etc. The potential is enormous but so are risks in investing in bulletin board listed pennies so go in with only your, well, mad money. They speak at the Independent Petroleum Producer of America (IPAA) small cap conference this morning just before the open. You can listen live or check out the replay of the webcast here.

NFX Reports 4Q Brick.

  • Expected: $0.97 EPS, $530 million revenue.
  • Actual: $0.86 and $427 million. I gotta say I’m shocked the Street could be this far off. Some of the earnings miss will be forgiven since it’s based in part on the timing of hurricane related expenses from last year. However the top line miss is a Street blunder.
  • These guys have already announced timing related production delays and 2007 should be a much better year in terms of operating costs and production growth than 2006 (much of the bad news is behind them). In fact G&A and other cash costs fell on a YoY per unit basis. It was really just the LOE which jumped and that will come back down soon.
  • Reserves up 14% – all organic. 111% reserve replacement. Not a world beater but that wasn’t expected this year. All in finding and development costs surged to $2.18/Mcfe and I honestly don’t know if this big an increase was anticipated by the Street. I’d guess not. You can always tell if it will be perceived positively or negatively if the press release contains the calculation or if you have to do the math yourself. In this case I did the math. On the other hand, some of NFX’s peers like PXD are reporting F&D costs north of $3/mcfe ($18 / barrel).

2006-nfx-fda.JPG

  • 1Q Guidance probably won’t please since it’s down sequentially:
  • 4Q production:67.9 Bcfe (81% gas),
  • 1Q Estimated production range of 59.4 to 66.2 Bcfe
  • Costs look much better however with LOE tumbling

SFY Reports A 4Q Beat

  • Expected: $1.06 EPS, $156 mm revenue
  • Actual: $1.16
  • 2007: expect to grow production 7-10%, reserves 4-6%
  • Their ops in New Zealand are really declining pretty quickly and with the slowing growth of domestic production they’re estimating another sequential decline in production.
  • Costs appear well contained.
  • All in all, they just had a great year but it’s hard to get too excited about near term guidance. Just watching for now.

 AXC presenting at Scotia small cap conference 2/14. Very interesting company. More soon.

MRO had a couple of sizable discoveries offshore Angola with TOT.

Analyst Watch: APA upgraded by Opco to buy, SU cut to underperform by FBR, CNQ cut to hold at FBR (FBR taking the Canadian stocks down, probably over all the dire capex budgets and comments of late about weak prices). Note TLM got cut the other day.

Other Stuff I’m thinking about right now. Coal is probably headed lower soon. I’ll have a piece out on coal over the next week or so but for now know that inventories remain high but coal prices ran up with natural gas prices. BTU and ACI should roll over here as coal comes in.

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24 Responses to “Thursday – Big Gas Draw Day But It Should Already Be Discounted”

  1. zmann said

    PTSG getting haircut back to $1.10 on “buy the rumor, sell the news” actions this am.

    Potential reserves from 15,000 gross acres (at present) in the Barnett: 10 mm boe. Company has 3.8 mm boe so it’s pretty significant. They’ve identified another 5 mm boe potential in other projects.

    Resevoir engineer is Ryder Scott.

    I think profit taking my be over at this level and ready for the next leg up.

  2. zmann said

    PTSG additional 8.3 mm boe outside the shale identified, not 5.

    PTSG starting to spring back.

  3. zmann said

    PTSG – other non core properties identified with 5 mm boe net potential.

    So that’s 24+ mmboe identifed reserve potential vs current proved reserves of 3.8 mm boe.

    I wouldn’t chase this past $1.20 given my thoughts on oil and gas but it does have potential and not just the shale. Future catalysts include finding a partner for a pretty good looking waterflood in N. Texas.

  4. zmann said

    NFX – down $1.90. Downgrades should be forthcoming. I’ll buy this when everything settles down – may take a few weeks.

  5. gungagalonga said

    Z-

    Sorry for my recent quietness… Distractions in life…

    My call on the storage number is a little less than yours. I’m looking for around 207 bcf. This slightly less number reflects discounts for a variety of reasons, most of which I learned from you.

    The Bbear v. Bull nat gas market has developed into a good old fashioned foot race this year.

    What are your parameters for a bullish vs. bearish end of year storage number? Is above 1,600 bearish, below 1,400 bullish with everything in between a push?

    Thanks

  6. zmann said

    Welcome back Gunga! Here ya life distracts

    How about at 207 or below I buy the next pint at bark and quack, at 220+ you buy and in between we just leave without paying?

    Hopefully I’m just being conservative. Heard the Street’s at 216.

    Next week I expect smaller.

    That range sounds as good as any. I’d have said 1,500 and above is bearish and 1200 and below still bullish but it’s all just rounding and we’ve got plenty.

    Learned from me? Not the other way around? You kidder.

  7. zmann said

    224 Bcf

  8. gungagalonga said

    Nice call Z!

    With a 224 B draw we are now at a YOY deficit.

  9. zmann said

    Thanks G. Just a little one, maybe 20 Bs but next week we’ll get into down over 100 Bcf territory on the YoY.

    This is a big number but I think not big enough to keep gas up with the expectation of a smaller number next week looming.

    Did you see NFX? $2.18 F&D with 111% replacement. Down guidance. How does that not get smacked as prices retrench? Gotta see some downgrades there tomorrow.

  10. zmann said

    BHI about to get smoked. They’re a good proxy for the OIH with lower option premiums and a chart that has recently run too far too fast. DO had great numbers and has given back most of the $2 pop it got early this morning. Not a good sign for the drillers and service companies because it just doesn’t get any better than last year.

  11. nltd said

    Z

    FWIW (in case you hadn’t noticed, which I’m sure you probably have) DO nearly back up to “pop” level from this am. . .

    N

  12. Raj said

    BHI hit the resistance @70 3 times today. Any TA expert to dissect this?

    R

  13. GGas said

    Z Man. I think you are right. We will see 8 before we see 6 in gas. Again as we approach the 1.5T/ 1.6T number gas people get paranoid. Also, watch out. Storage companies require cycling this time of year. This will force some gas onto the market. Get ready for some volatility.

  14. zmann said

    Cable modem out for last three or so hours. I wake up from my electric coma to find oil up $2 on Elk Hills. I really hate comcast right now.

    I expect this kind of thing from BP but not OXY. That is an over-reaction. They saw an opportunity to go for $60 and failed is the only bright spot. Gasoline up a nickel!!!??? You’ve got to be friggen kidding me! TSO puts not a bad bet at all. This just made the west coast oil price jump more than nymex so TSO’s cost structure just went up. Silly market.

    Nat gas would have closed lower had it not been for the rally in crude. I took additional tso and vlo yesterday but if I hadn’t I’d take more now.

    Watch out with additional puts today b/c I bet the rumor about the unions striking in Nigeria will be refloated tomorrow. Their president snubbed them b/c he’d rather see oil rally than fight the rebels (who are backed by his political allies).

  15. zmann said

    GGas – very good point on the cycling. When does it usually occur, March, April?

  16. GGas said

    cycle has to occur before april.

  17. zmann said

    Thanks GGas. Is it a FERC requirement? Got any documentation on it?

  18. gary said

    Zmann,

    Thanks for the great site.

    TSO seems to move very closely with crude price: it goes crazy when crude goes up. I wonder why. Because of this, wouldn’t you think higher west coast oil price is good for TSO?

  19. tom2oc said

    Z, FYI in case you didn’t know I just read this: “Goldman came out with a research note today, putting a $71 target on crude– for 2007”

    Here goes the oil pumpers again. I’m staying out of this sector until I see a solid trend reversal. Gee, that’s a tough sector to trade now. I prefer techs!

  20. zmann said

    Thanks Tom – Didn’t see that but it’s not surprising.

    $71 eh? I’ll add that to tomorrows odds and ends commentary.

    Thanks again and yes, it’s pretty volatile with no clear directionality at present.

  21. GS… Funny funny funny guys.
    Sad thing is that enough people listen to them, and they have a lot of weight in the sector. Nothing of what GS says on their targets is about fundies. It is all about speculation and investment, the speculation makes them the money on their investment. Funny they raised their target now, right after the $10 no-sense run-up. I wonder if they re-adjusted their weighting in oil to help the run-up? I still remember GS and the gasoline futures, when lessened their weighting and dropped the price by about 0.15 in one or two days.

    As long as funds keep pumping money into oil / nat, it will be volatile.

    I was looking at inventory / demand chart histories and came to some numbers

    OK
    value of oil: ~$25 ( Up from ~$20 in 2005 d/t dollar weakness )
    demand premium: ~$10 ( Demand growth is not what they are making it out to be 0.8% in 2005, 1% in 2006?… 2003 and 2004 had higher demand premiums of somewhere between $15 and $25 )
    geopolitical premium: ~$8 ( Things just are not as tense as last year. ~$15 on 2006 )

    Ok so right now we are probally looking at ~$43/Barrel fair market value. The other $16 a barrel is all fund money and speculators.

    Just my 2 cents, hell I probably don’t even know what I am taking about.

    Have a good evening everyone,

    -SaneO

  22. zmann said

    Gary,

    It should move higher with gasoline and heating oil prices. If their move is outpace by crude than the 3-2-1 crack spread falls. For those who don’t know the 3-2-1 is the basic calc for taking the cost of 3 bls of oil which the refineries must buy less the profits they get from the 2 barrels of gasoline and 1 barrel of distillates that are generally produced (round numbers) when refining oil.

  23. gary said

    Thanks, Zmann. You’re great. You should’be talking about oil on CNBC. Or is CNBC too dumb for you?

  24. reaction to zithromax

    news

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